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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: srps who wrote (5056)	1/14/2004 1:47:05 PM
From: mishedlo	Read Replies (2) of 110194

Eurodollars are an INTEREST rate play, not a currency play. Not only that it has NOTHING to do with Euros at all. It is a damn silly and confusing name. Eurodollars are expected interest rates looking 3 months forward from a particular month. They go years out. The actual definition is interest rate paid on a three month US$ deposit typically by foreign investors in Europe, Japan or anywhere else. Eurodollr futures had priced in enormous rate hikes. Given the fragility of the "recovery" and the FEd's statements of concern about jobs and little else, It was easy (for me) to come to the conclusion the FED was just not going to hike. Period. Just in case I was wrong, I shorted OTM eurodollar puts figuring that even IF they hike it will not be as much as the futures implied. I shorted some puts for 26 basis points and just recently covered them for 3. A basis point is $25. 100 is the max value of a eurodollar contract and that represents a rate of 0%. A future at 98.00 implies an interest rate looking forward of 2%. Actually there is about 20 poinst of differential so a eurodollar future of about 97.80 (more or less) is a 2% expected rate. The curve not too long ago was very steep. Rate hikes of 1/4 to 1/2 were implied for every quarter from June 04 thru Sep 05 and I thought that was totally off base and bet huge (relative to the size of my acct) against that. I am now into Euribor calls (same deal on the Euro) betting that not only do they not hike (which is totally preposterous) but that Euroland will cut. FF rate in europe is 2% and I bet we see a 1/4 or 1/2 cut if nothing else just to support the US$ vs the Euro. Even IF they do not cut, the futures imply a hike which is enormously unlikely IMO. Mish

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