Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: KyrosL who wrote (3701)	12/21/2003 12:22:14 PM
From: mishedlo	Read Replies (3) \| Respond to of 110194

Eurodollars I must be missing something. Can you briefly educate me on Eurodollars, please? Why are they any different from American dollars? Are Eurodollar interest rates much different than American dollar interest rates? Aren't Eurodollars just American dollars deposited in European banks? Eurodollars are not a currency play. Eurodollars are an INTEREST rate play on US dollars. The actual definition is something like interest rates on US $ held overseas. Eurodollar futures go years out. The futures are discounting huge interest rate HIKES. The further out you go, the steeper the curve. maximum value on a contract is 100. When Eurodollar futures are 100, no interest rates hike is planned and interest rates are at 0. It is a little more complicated than that as there is roughly a .18 differential between 0 expectations of a hike and the actual fed funds rate which is 1. Assuming no hike looking forward, then Eurodollar futures would tend towards 98.82 or so. In fact that is about where they have closed for months on end. Here is the curve going forward. Mar 04 98.76 Jun 04 98.54 Sep 04 98.20 Dec 04 97.80 Mar 05 97.40 Jun 05 97.00 Sep 05 96.65 There is one more important quirk. Eurodollar futures look forward 3 months. Thus the Mar eurodollar future is really an expectation, at Mar expiry of what rates will be in June. I call that the implied forward looking rate. Not sure if it really has a name or not. Esentially Eurodollar futures are telling us that implied forward looking interest rates are expecting the following rate hikes. I did a bit of rounding .00 Mar 04 .25 Jun 04 .25 Sep 04 .40 Dec 04 .40 Mar 04 .40 Jun 04 .35 Sep 04 ========================== Thus the Eurodollar futures implay a rate hike every damn quarter going forward starting June 04. I have a huge bet going (relative to the size of my account) that says that this is not going to happen. Over 2 points of interest rate hikes by Sep 05. I do not buy that one bit. Futures move $25 per basis point. the difference between 98.00 and 98.25 is 25 basis points. If you can capture 25 basis point you make 2525 = $625 If you buy a Sept 05 Eurodollar future and the implied rate goes from 96.65 to 97.65 (which is still roughly a 1% rate hike) you make 10025 or $2,500 per contract. To win on this bet, all that needs to happen is for interest rates to rise less than futures imply, or take longer to get there than implied. There are other ways to play as well. The sept 2005 95.00 put is selling for 25 basis points. Is there a snowballs chance in hell of interest rates close to 4% by then. Personally I think this is free money. You can make 2525 or $625 by shorting sept 2005 95 eurodollar puts. To make money on Eurodollars you can not do it by playing front months. There is no money to be made (or very little) betting on no rate hikes for Mar of 2004. I am in some Junes 04 plays but they are fully priced. The fat part of the curve (right now) is Mar 05 - Sept 05. Not too long ago the Sep 04's were at something like 97.80, now they are at 98.20. There was a lot of $ to be made there. I have some plays on every month from June 04 thru Sep 05 and I intend to keep rolling forward as long as it keeps working. Bear in mind that I am in the distint minority group here that says FED FUND rates will stay low. Everyone else here seems to think that "gold will forec the fed's hand" or "commodities will force the Fed's hand" or "the bond market will force the FED's hand" or whatever. I structured my bets in a way that hikes can be allowed, but not as big as implied. Shorting puts, or buying futures with CC's does exactly that. For another example, If you buy the Sep 05 future for 96.65 you can sell the 97 call for about $1,300 and still have upside potential on the future for another $35 basis points (35*25) and pocket all that money as long as implied interest rates in Sept 2005 closing are less than roughly 3%. Do you like those odds? I sure do. M