PART TWO
Building Blocks: Eurodollar Futures

The Eurodollar time deposit market has become the linchpin of the private credit market for dollar-denominated transactions. Maturities in this market extend out as far as 10 years. At the same time, one of the major thrusts of financial innovation has been to separate conventional financial products into their basic components. This is evident, for example, in the creation of many zero-coupon bonds by the stripping of coupons from conventional Treasury bonds. We also find investors breaking up the yield curve into segments. The result is a mix-and-match world in which a borrower or lender can have just about any kind of liability or asset imaginable.

In part because of the extraordinary success of the 3-month Eurodollar futures contract, the 3-month Eurodollar time deposit has become one of the basic building blocks of the short end of the yield curve.

The purpose of these chapters is to provide what you need to know about the Eurodollar time deposit market and to show how Eurodollar futures fit in. In particular, we will explain what Eurodollar futures are, how they are priced, and how they can be used to hedge the cost of funds.