The Eurodollar futures and options handbook

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Bibliographic Information

The Eurodollar futures and options handbook

Galen Burghardt

（The Irwin library of investment and finance）

McGraw-Hill, c2003

  • : hardcover

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Includes index

Description and Table of Contents

Description

This is today's most up-to-date and comprehensive resource for eurodollar futures traders, hedgers, and researchers. Eurodollar futures, and put and call options traded on those futures, revolutionized the world of banking and finance and are now among the most widely traded money market contracts in the world. "The Eurodollar Futures and Options Handbook" explores the complete range of current research and trading practice on these uniquely flexible trading vehicles, and tells you everything you need to know to increase your profits - and, more important, control your losses - when navigating this complex market.Featuring contributions from leading Eurodollar experts, including the author's seminal articles on Eurodollar convexity bias and measuring and trading term TED spreads, this long-awaited book explains: Eurodollar futures - What they are, how they are priced, and how they can be used to hedge interest rate risk and trade the yield curve; Eurodollar options - structures and patterns of Eurodollar rate volatilities, along with price, volatility, and risk parameter conventions of Eurodollar options.Eurodollar futures and options trading has grown exponentially, with no end in sight to its phenomenal growth. Let "The Eurodollar Futures and Options Handbook" arm you with the latest knowledge on these important trading vehicles, and provide you with the strategies and techniques you need to make the most of this liquid and lucrative market. Today's Eurodollar market - the market for dollar denominated deposits outside of the United States - is perhaps the largest and most liquid of the world's short-term dollar markets and is becoming the new standard of value for fixed income markets. For over a decade, futures and options traders in this market have relied on "Eurodollar Futures and Options" (by Burghardt, Belton, Lane, Luce, and McVey) for accurate market analysis coupled with solid, results-oriented trading and hedging strategies.Markets have changed dramatically, however, and the need for a comprehensive new handbook has become obvious and acute. The "Eurodollar Futures and Options Handbook" takes over where that book left off and incorporates all of the major advances in understanding how Eurodollar futures and options work and how traders and hedgers should use them. With contributions from Galen Burghardt, his colleagues, and collaborators, this hands-on volume focuses on every facet of this powerful market. It provides practitioners with practical, detailed discussions of: the Eurodollar market - growth, expansion, and consolidation of the interest rate markets; key money market developments; the birth of Eurodollar futures; exchange-traded money market futures and OTC interest rate swaps; Eurodollar futures - the Eurodollar futures contract; forward and futures interest rates; and hedging with Eurodollar futures; pricing and hedging swaps.It includes: the convexity bias, with new convexity bias series; measuring and trading term TED spreads; hedging and trading with stacks, packs, and bundles; hedging extension risk in callable agency notes; the S&P 500 calendar roll; trading the turn Eurodollar Options - the Eurodollar option contract; price, volatility, and risk parameter conventions; caps, floors, and Eurodollar options; structure and patterns of Eurodollar rate volatility; trading with serial and mid-curve Eurodollar options; relative versus basis point volatility, including volatility cones; and hedging convexity bias.Until now, most of the material in this book was available only in assorted and often hard to find research notes. Eurodollar futures and options traders had to seek out special courses or know someone who had access to these notes. The "Eurodollar Futures and Options Handbook" combines greatly improved basic tools and research applications with current research on Eurodollar futures and options, and saves you both time and money by giving you all of the important basic tools and applications in one comprehensive, accessible volume.

Table of Contents

Foreword Part One The Emergence of the Eurodollar Market Chapter 1 The Emergence of the Eurodollar Market The Revolution in Finance The Futures Revolution Key Money Market Developments Why Eurodollars? Eurodollar Futures 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 Markets around the World Part Two Building Blocks: Eurodollar Futures Chapter 2 The Eurodollar Time Deposit Maturities and Settlement Quotes LIBOR and LIBID Interest Calculations Chapter 3 The Eurodollar Futures Contract Contract Specifications Contract Unit Price Quote Tick Size Minimum Fluctuation Listed Contract Months Contract Month Symbols Color-Coded Grid Expiring versus Lead Contract Trading Hours and Mutual Offset Final Settlement Price Last Trading Day Value Dates Additional Trading Facilities Initial and Maintenance Performance Bonds Volume and Open Interest 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 Richness and Cheapness Forward Rates Are Break-Even Rates Yield Curve Trades 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 Basic Hedge Algebra 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 Managing Hedge Ratios As Rates Rise or Fall As Time Passes Practical Considerations in Real Hedges The Stub Period Date and Term Mismatches Whole Contracts Credit Spreads Variable Credit Spreads Chapter 6 Pricing and Hedging a Swap with Eurodollar Futures Fixed/Floating Interest Rate Swaps Notional Principal Amount Cash Flows in Arrears Periodicity Spot and Forward-Starting Swaps Day-Count Conventions and Swap Yields Approaches to Pricing and Hedging Interest Rate Swaps Cash Flow Approach Hypothetical Security Approach Pricing a Swap Using the Cash Flow Method Hedging a Swap Using the Cash Flow Method Primary Effects Secondary Effects Calculating Hedge Ratios Hedge Ratios Are Dynamic Pricing a Swap Using the Hypothetical Securities Method Hedging a Swap Using the Hypothetical Securities Method Floating Rate Liability Fixed Rate Asset Find the Hedge Ratios 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 Synopsis Introduction Interest Rate Swaps and Eurodollar Futures A Forward Swap The Value of a Basis Point 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 Trading the Hedge How Much Is the Convexity Bias Worth? How Correlated Are the Rates? 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 A Workable Rule of Thumb Applying the Rule of Thumb 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 Biases in Forward Swap Rates The Market's Experience with the Convexity Bias Now What? Running a Receive Fixed, Pay Floating Swap Book Marking a Swap Book to Market Volatility Arbitrage Evaluating Term TED Spreads 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 What Is the Convexity Bias? How Have We Done? Convexity Bias Greeks Convexity Bias Delta Convexity Bias Vega Convexity Bias Theta 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 Synopsis TED Spreads Simple TED Spreads Term TED Spreads Two Kinds of Term TED Spreads 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 Do These Rates Compare? How Directional Is the Spread? Trading the Spreads Hedge Ratios What to Do with the Stub Overnight Financing Term Financing Carry and Convergence Convexity Forward Term TED Spreads 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 Synopsis Three Objectives How Good Are Stack, Pack, and Bundle Hedges? Curve-Augmented TED Spreads? Hedging and Trading with Eurodollar Stacks, Packs, and Bundles Basics: Dates, Names, Packs, Bundles, and Quotes Contract Colors Packs and Bundles Quote Practices 1: Ticks 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 Horizon Matters The Dangers of Decorrelation Scaling Your Hedges to Reduce Hedge Error Trading Curve TEDs Calculating the Hybrid Spread Looking for Opportunities Chapter 14 Hedging Extension and Compression Risk in Callable Agency Notes Galen Burghardt and William Hoskins Research note originally released March 24, 1995 Synopsis Introduction What Is the Exposure in a Callable Agency Issue? Extension and Compression Risk A Packaged Deal What Is the Package Worth? What Is the Risk Exposure? Structuring a Hedge The Option Is Tougher Focus on Delta Hedging Synthetic Forward Notes Different Deltas 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 Risks in the Hedge The Yield Spread between Agencies and Treasurys What If There Is Little or No Call Protection? Sometimes Strips of Eurodollar Futures Provide Better Hedges Netting Positions Adjusting the Hedges Chapter 15 Opportunities in the S&P 500 Calendar Roll Galen Burghardt and George Panos Research note originally released June 7, 1999 Synopsis 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 Fair Value of the Spread Implied Financing Rate 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 Synopsis What Is "the Turn"? Two-Day Turns Three-Day Turns Four-Day Turns Rate Behavior around the Turn Effects on Eurodollar and LIBOR Futures Prices Rule of Thumb for a 4-Day Turn Rule of Thu mb for a 3-Day Turn Rule of Thumb for a 2-Day Turn Implied Turn Rates Implications for Futures Spreads December LED Spread December/January LIBOR Spread December/March Eurodollar Spread December TED Spread Effect of the Turn on LIBOR and Eurodollar Volatilities Theoretical Turn Volatility Premiums So What? The Risks in the Trade Chapter 17 The Turn: An Update Hedging the Stub Part Four Building Blocks: Eurodollar Options Chapter 18 The Eurodollar Option Contract Option Expirations and Underlying Futures Standard Quarterly Options Serial Options Mid-curve Options Five-Year Bundle Options Option Contract Specifications Contract Unit Price Quote Tick Size Minimum Fluctuation Strike Price Increments Listed Contract Months Contract Type and Month Symbols Sample Option Quotes Trading Hours Last Trading Day Exercise of Option Assignment Chapter 19 Price, Volatility, and Risk Parameter Conventions Pricing Options on Futures Option Price (Market) Volatility Relative Rate Volatility Rate (Basis Point) Volatility Period Volatility Implied Volatility Risk Parameters Delta Gamma Vega Theta Rho Intrinsic and Time Value 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 Yield Curve Trade Maturity Structure of Volatility (Volatility Cones) Volatility Skews Implied Rate Distributions Chapter 22 Practical Considerations Early Exercise Cash Settlement and Exercise 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 Synopsis Eurodollar Strategy Triangle FOMC and Other Volatility Trades Spreads against OTC Treasury Options LIFFE Joins the Crowd The Full Constellation of Eurodollar Options Standard Quarterly Options Serial Options Mid-curve Options Serial 1-Year Mid-curve Options The Beauty of This Design 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) Different Volatility Horizons Mid-curve Options versus OTC Treasury Options Eurodollar/Treasury Volatility Spread Trading How Do You Compare the Volatilities? How Do You Construct the Trades? Some Things to Keep in Mind LIFFE's Options 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 Background Was Volatility Rich or Cheap? Volatility and Rate Levels Why Relative Rate Volatility? What Is the Evidence? Is it the Fed? Practical Consequences Chapter 26 Eurodollar Volatility: An Update Chapter 27 Hedging Convexity Bias Galen Burghardt and George Panos Research note originally released August 2, 2001 Synopsis The Challenges Overcoming the Challenges Hedging a 4-Year Swap/Eurodollar Position Gamma Vega Eurodollar Options Gamma Mismatch? The Choice? Robustness? Glossary Index About the Author Footnotes Chapter 1 Footnote 1 Chapter 3 Footnote 1 Footnote 2 Chapter 4 Footnote 1 Footnote 2 Footnote 3 Footnote 4 Footnote 5 Chapter 6 Footnote 1 Chapter 8 Footnote 1 Footnote 2 Chapter 11 Footnote 1 Footnote 2 Chapter 13 Footnote 1 Chapter 14 Footnote 1 Chapter 17 Footnote 1 Chapter 18 Footnote 1 Chapter 21 Footnote 1 Footnote 2 Chapter 23 Footnote 1 Footnote 2 Glossary Footnote 1

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