EURO-DOLLAR FUTURES

[scorpiomanoj]

Hi David,

Assuming today is jan 1 2009, does a 3 month euro dollar futures contract MATURING 1 year mean that the contract starts from Jan 1 2010 and matures march 31, 2010, or does it mean that the contract starts from october 1, 2009 and matures jan 1, 2010. Once again apologize for asking a very basic question.

Thanks
Regards
Manoj Kumar Halan.

 

[David Harper CFA FRM]

Hi Manoj,

Nearer to your first statement. Although, because this is a derivative, may be helpful to break into two pieces:

1. The 3-month period is "merely" part of the reference; the underlying is a 3-month interest rate.
2. The futures contract, in your example, is a one-year contract: bought on Jan 1st and settled (at maturity) on Jan 1st. Like any future, it "merely" refers to an underyling, in this case, the underlying is the 3 month interest rate that applies on the settlement day; i.e., the 3 month (spot) rate that applies if borrowing from Jan 1st to March 31st.

See how the futures contract (the derivative), in your example, has a one-year maturity and the underlying that is references has a three-month maturity (by design the maturity on the underlying rate "starts" when the futures settles)

Hope that helps (please no apologies about basic questions: it is what we do, I love the basics, they are constantly teaching me!)

David