Confused about eurodollar futures
A eurodollar futures contract is a cash-settled futures contract based on a Eurodollar Time Deposit and having a principal value of USD ,000,000 with a 3-month maturity.
Suppose that a a bank decides to sell (or buy) 5 eurodollar futures that settle in three months. What exactly does it mean? What is going to happen when the contract expires?
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If they short the contract, that means, in 5 months, they will owe if the price goes up (receive if the price goes down) the difference between the price they sold the future at, and the 3-month Eurodollar interbank rate, times the value of the contract, times 5. Though, on a technical note, futures are marked to market daily so you owe or receive that money every day during that period.
If they're long, they receive if the price goes up (owe if the price goes down), but otherwise unchanged.
Cash settlement means they don't actually need to make/receive a three month loan to settle the future, if they held it to expiration - they just pay or receive the difference. This way, there's no credit risk beyond the clearinghouse.
The final settlement price of an expiring three-month Eurodollar futures (GE) contract is equal to 100 minus the three-month Eurodollar interbank time deposit rate.
Thanks to 0xFEE1DEAD for the daily MTM reminder.
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