In December of 1981, the Chicago Mercantile Exchange (CME) introduced a futures contract based on 3-month Eurodollar interest rates. In the nearly twenty years since its inception, this contract has become one of the most versatile trading and hedging vehicles offered on the listed marke t s .The contract re p resents a $1,000,000, 3-month London Interbank Offered Rate (LIBOR) deposit. CME Eurodollar futures a re cash-settled, t h e re fo re, t h e re is no delive ry of a cash instrument upon expiration because cash Eurodollar time deposits are not transferable | Strips Arbitraging the Eurodollar Cash and Futures Markets Updated June 2001 Strips Arbitraging the Eurodollar Cash and Futures Markets Updated June 2001 In December of 1981 the Chicago Mercantile Exchange CME introduced a futures contract based on 3-month Eurodollar interest rates. In the nearly twenty years since its inception this contract has become one of the most versatile trading and hedging vehicles offered on the listed contract represents a 1 000 000 3-month London Interbank Offered Rate LIBOR deposit. CME Eurodollar futures are cash-settled therefore there is no delivery of a cash instrument upon expiration because cash Eurodollar time deposits are not transferable. Of the contract s many uses one of the most significant has been by arbitrageurs in the money markets who often combine cash and futures positions to create a synthetic instrument called a strip. Many of the trades in the quarterly Eurodollar futures contracts are devoted to these strategies. A strip can mean combining cash deposits borrowings with a long short position in the futures contracts. Such a trade is initiated when it is determined that the trader can lock in a higher return or a lower borrowing cost than are otherwise available in a cash-only money market term strip is derived from the practice of using two or more consecutive quarterly futures expirations in combination with a Eurodollar cash position. The traders must determine for themselves whether the spread between the strip interest rate and the cash-only transaction is wide enough to make such a trade worthwhile. Below we will calculate a strip rate using actual market rates but first it might be beneficial to review how Eurodollar futures are priced. On April 19 2000 the September 2000 Eurodollar futures traded at an index price of CME calculates this price by subtracting the ED interest rate in this case from 100. Although the contract is referred to as 3-month Eurodollar .
