Saturday, August 15, 2009

Eurodollar interest rate futures(2)

These contracts differ from a forward market transaction in several ways. They are transacted or traded on organized exchanges such as the Chicago Mercantile exchange. Three month futures interest contrasts are sold in $1 million units and are traded in March, June, September, and December. Unlike the case in the forward market, where forward gains or losses are settled on the maturity date, gains and losses are settled on a daily basis in the future market. Participants are required to maintain a "margin" account, and the daily gains or losses are added or subtracted from this account depending on whether the current daily rate is below or above the contract rate. Thus, for every 1 basis point decline (increase) in the current interest rate compared with the final settlement rate on the previous day,$25 is added to (subtracted from) the holder‘s margin account for each forward interest contract. The daily cash settlements are based on daily final settlement price of three-month LIBOR obtained from 12 reference banks randomly selected during the last 90 minutes of trading.

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