CONTENTS
PART ONE
THE EMERGENCE OF THE EURODOLLAR MARKET
Chapter 1
The Emergence of the Eurodollar Market
The Death of CD Futures and the Birth of Eurodollar Futures
The Market for Interest Rate Derivatives at the Beginning of the 21st Century
Exchange-Traded Money Market Futures and OTC Interest Rate Swaps
Options on Futures, Forward Rates, and Swaps
PART TWO
BUILDING BLOCKS: EURODOLLAR FUTURES
Chapter 2
The Eurodollar Time Deposit
Chapter 3
The Eurodollar Futures Contract
Trading Hours and Mutual Offset
Initial and Maintenance Performance Bonds
Other 3-Month Money Market Futures Contracts
Chapter 4
Forward and Futures Interest Rates
Deriving a Forward Rate from Two Term Deposit Rates
Locking an Effective Forward Lending Rate Using Eurodollar Futures
Important Differences between Forward and Futures Markets
Determining the Fair Value of a Eurodollar Futures Contract
Forward Rates Are Break-Even Rates
Finding the Forward Term Deposit Curve Implied by Today’s Futures Rates
Chapter 5
Hedging with Eurodollar Futures
The Tool Is a Eurodollar Futures Contract
Deriving Present and Forward Values from Eurodollar Futures Rates
Calculating a Forward Value (Terminal Wealth)
Calculating a Zero-Coupon Bond Price (Present Value)
Hedging or Replicating Forward Cash Flows
Forward Valuing the Gain or Loss on the Eurodollar Futures Contract
Present Valuing the Gain or Loss on a Floater
Hedging or Replicating Present Values of Cash Flows
Calculating the Price of a Zero-Coupon Bond
Calculating the Present Value of a Basis Point
Finding the Hedge for a Zero-Coupon Bond
Faster Hedge Ratio Calculations with Calculus
Pricing and Hedging a Coupon-Bearing Bond
Practical Considerations in Real Hedges
Chapter 6
Pricing and Hedging a Swap with Eurodollar Futures
Fixed/Floating Interest Rate Swaps
Spot and Forward-Starting Swaps
Day-Count Conventions and Swap Yields
Approaches to Pricing and Hedging Interest Rate Swaps
Hypothetical Security Approach
Pricing a Swap Using the Cash Flow Method
Hedging a Swap Using the Cash Flow Method
Pricing a Swap Using the Hypothetical Securities Method
Hedging a Swap Using the Hypothetical Securities Method
Pricing and Hedging Off-the-Market Swaps
Convexity Differences between Forward and Futures Rates
Comparing Three Yield Curves: Forward, Zero Coupon, and Par Coupon
The Difference between Money Market Rates and Bond Yields
PART THREE
EURODOLLAR FUTURES APPLICATIONS
Convexity Bias (Chapters 7 through 10)
Term TED Spreads (Chapters 11 and 12)
Hedging and Trading with Eurodollar Stacks, Packs, and Bundles (Chapter 13)
Hedging Extension Risk in Callable Agency Notes (Chapter 14)
Opportunities in the S&P Calendar Roll (Chapter 15)
Trading the Turn (Chapters 16 and 17)
Chapter 7
The Convexity Bias in Eurodollar Futures
Galen Burghardt and William Hoskins
Research note originally released September 16, 1994
Interest Rate Swaps and Eurodollar Futures
Reconciling the Difference in Cash Flow Dates
Hedging the Forward Swap with Eurodollar Futures
The Other Source of Interest Rate Risk in the Forward Swap
Interaction between the Two Sources of Risk
How Much Is the Convexity Bias Worth?
Estimating the Value of the Convexity Bias
Calculating the Value of the Bias
Reconciling the Difference between a Swap and a Eurodollar Futures Contract
How One Would Pay for the Advantage
Translating the Advantage into Basis Points
The Importance of Time to Contract Expiration
The Cumulative Effect of All This Drift
How Sensitive Are the Estimates to the Assumptions?
Practical Considerations in Applying the Rule
The Importance of the Bias for Pricing Term Swaps
The Market’s Experience with the Convexity Bias
Running a Receive Fixed, Pay Floating Swap Book
APPENDIX A
Deriving the Rule of Thumb
APPENDIX B
Calculating Eurodollar Strip Rates and Implied Swap Rates
Chapter 8
Convexity Bias Report Card
Galen Burghardt, William Hoskins, and Niels Johnson
Research note originally released April 15, 1997
Chapter 9
New Convexity Bias Series
Galen Burghardt and Lianyan Liu
Research note originally released February 1, 2002
Chapter 10
Convexity Bias: An Update
Chapter 11
Measuring and Trading Term TED Spreads
Galen Burghardt, William Hoskins, and Susan Kirshner
Research note originally released July 26, 1995
Unweighted Eurodollar Strip Yields versus Treasury Yields
Weighted Eurodollar Strip Yields versus Treasury Yields
Implied Eurodollar Yield versus Treasury Yield
Fixed Basis Point Spread to Eurodollar Futures Rates
How Directional Is the Spread?
Term TED Spreads and Swap Spreads
APPENDIX
Complete Operating Instructions for Calculating Term TED Spreads and Hedge Ratios
Chapter 12
TED Spreads: An Update
Chapter 13
Hedging and Trading with Eurodollar Stacks, Packs, and Bundles
Galen Burghardt, George Panos, and Fred Sturm
Research note originally released December 15, 1999
How Good Are Stack, Pack, and Bundle Hedges?
Hedging and Trading with Eurodollar Stacks, Packs, and Bundles
Basics: Dates, Names, Packs, Bundles, and Quotes
Quote Practices 2: Use Price Level for Individual Contracts
Quote Practices 3: Use Price Changes for Packs and Bundles
Unpacking Packs, Unbundling Bundles
Hedging with Stacks, Packs, and Bundles
What Happens to the Correlations?
Best Pack Proxies for Key Treasury Maturities
Scaling Your Hedges to Reduce Hedge Error
Chapter 14
Hedging Extension and Compression Risk in Callable Agency Notes
Galen Burghardt and William Hoskins
Research note originally released March 24, 1995
What Is the Exposure in a Callable Agency Issue?
Extension and Compression Risk
Example of Hedging a 10-Year, 8.5 Percent Coupon Note, Callable in 5 Years
Step 1: Find the Price of the Forward Note
Step 2: Find the Embedded Option’s Delta
Step 3: Calculate Spot Market Hedge Ratios
Step 4: Calculate Futures Hedge Ratios
Step 5: Adjust the Hedge as Interest Rates Change
The Costs and Risks of Delta Hedging
The Yield Spread between Agencies and Treasurys
What If There Is Little or No Call Protection?
Sometimes Strips of Eurodollar Futures Provide Better Hedges
Chapter 15
Opportunities in the S&P 500 Calendar Roll
Galen Burghardt and George Panos
Research note originally released June 7, 1999
Save 15 Basis Points per Year on the Roll
Eliminate Interest Rate Risk in the Roll
Earn Superior Money Market Returns
The Value of the Calendar Spread
How the Calendar Spread Has Behaved
What Is Your Exposure to Interest Rates?
Handling Rate Exposure in the Roll
Hedging against Interest Rate Risk
Cash Management and Portfolio Replication
Chapter 16
Trading the Turn: 1993
Galen Burghardt, Mike Bagatti, and Kevin Ferry
Research note originally released October 25, 1993
Effects on Eurodollar and LIBOR Futures Prices
Rule of Thumb for a 4-Day Turn
Rule of Thumb for a 3-Day Turn
Rule of Thumb for a 2-Day Turn
Implications for Futures Spreads
December/March Eurodollar Spread
Effect of the Turn on LIBOR and Eurodollar Volatilities
Theoretical Turn Volatility Premiums
PART FOUR
BUILDING BLOCKS: EURODOLLAR OPTIONS
Chapter 18
The Eurodollar Option Contract
Option Expirations and Underlying Futures
Option Contract Specifications
Contract Type and Month Symbols
Chapter 19
Price, Volatility, and Risk Parameter Conventions
Chapter 20
Caps, Floors, and Eurodollar Options
Chapter 21
Structure and Patterns of Eurodollar Rate Volatility
Historical, Implied, Realized, and Break-Even Volatilities
Term Structure of Eurodollar Rate Volatility
Volatility Calendar Spread Trade
Maturity Structure of Volatility (Volatility Cones)
Chapter 22
Practical Considerations
PART FIVE
EURODOLLAR OPTION APPLICATIONS
Trading with Serial and Mid-curve Eurodollar Options (Chapters 23 and 24)
What Happens to Eurodollar Volatility when Rates Fall? (Chapters 25 and 26)
Hedging Convexity Bias (Chapter 27)
Chapter 23
Trading with Serial and Mid-curve Eurodollar Options
Galen Burghardt and Scott Lyden
Research note originally released June 22, 1998
FOMC and Other Volatility Trades
Spreads against OTC Treasury Options
The Full Constellation of Eurodollar Options
Serial 1-Year Mid-curve Options
The Eurodollar Strategy Triangle
June/Short June (A Yield Curve Spread)
Short June/Red June (A Time Decay Spread)
March/Red June (A Volatility Curve Spread)
Mid-curve Options versus OTC Treasury Options
Eurodollar/Treasury Volatility Spread Trading
How Do You Compare the Volatilities?
How Do You Construct the Trades?
Chapter 24
Serial and Mid-curve Options: An Update
Chapter 25
What Happens to Eurodollar Volatility When Rates Fall?
Galen Burghardt, George Panos, and Eric Zhang
Research note originally released October 18, 2001
Chapter 26
Eurodollar Volatility: An Update
Chapter 27
Hedging Convexity Bias
Galen Burghardt and George Panos
Research note originally released August 2, 2001