Eurodollar: Difference between revisions

Content deleted Content added

Inline

Latest revision as of 10:09, 23 December 2024

Eurodollars are U.S. dollars held in time deposit accounts in banks outside the United States. The term was originally applied to U.S. dollar accounts held in banks situated in Europe, but it expanded over the years to cover US dollar accounts held anywhere outside the U.S. Thus, a U.S. dollar-denominated deposit in Tokyo or Beijing would likewise be deemed a Eurodollar deposit (sometimes an Asiadollar). More generally, the euro- prefix can be used to indicate any currency held in a country where it is not the official currency, broadly termed "eurocurrency", for example, Euroyen or even Euroeuro.

Eurodollars have different regulatory requirements than dollars held in U.S. banks. Eurodollars can be riskier than assets held in U.S. banks, which include at least partial deposit insurance, and as a result, demand a higher interest rate.^[1]

The use of Eurodollars has been on a consistent decline.^[2]

There is no connection with the euro currency of the European Union.

History

After World War II, the quantity of physical U.S. dollar banknotes outside the United States increased significantly, as a result of both the dollar funding of the Marshall Plan and from dollar proceeds of European exports to the U.S., which had become the largest consumer market.

As a result, large amounts of U.S. dollar banknotes were in the custody of foreign banks outside the United States. Some foreign countries, including the Soviet Union, also had deposits in U.S. dollars in American banks, evidenced by certificates of deposit. Various narrations are given of the creation of the first eurodollar account, but most trace back to Communist governments keeping dollar deposits abroad.

In one version, the first eurodollar account was created in France in favour of Communist China, which in 1949 managed to move almost all of its U.S. dollar banknotes to the Soviet-owned Banque Commerciale pour l'Europe du Nord in Paris before the United States froze its remaining U.S. situated assets during the Korean War.^[3]

In another version, the first eurodollar account was created by an English bank in favour of the Soviet Union during the Cold War, following the invasion of Hungary in 1956, as the Soviet Union feared that its deposits in North American banks would be frozen as a sanction. It therefore decided to move some of its U.S. dollars held directly in North American banks to the Moscow Narodny Bank, an English limited liability company registered in London in 1919, whose shares were owned by the Soviet Union. The English bank would then re-deposit the dollars into U.S. banks. Thus although in reality the dollars never left North America, there would be no chance of the U.S. confiscating that money, because now it belonged legally to the British bank and not directly to the Soviets, the beneficial owners. Accordingly, on 28 February 1957, the sum of $800,000 was duly transferred, creating the first eurodollars. Initially dubbed "Eurobank dollars" after the bank's telex address, they eventually became known as "eurodollars"^[4] as such deposits were at first held mostly by European banks and financial institutions.^[4] City of London banks, such as Midland Bank, now part of HSBC, and their offshore holding companies^[5] also played a major role in holding the deposits.

In the mid-1950s, Eurodollar trading and its development into a dominant world currency began when the Soviet Union wanted better interest rates on their Eurodollars and convinced an Italian banking cartel to give them more interest than could have been earned if the dollars were deposited in the U.S. The Italian bankers then had to find customers ready to borrow the Soviet dollars and pay above the U.S. legal interest-rate caps for their use, and were able to do so; thus, Eurodollars began to be used increasingly in global finance.^[3]

By the end of 1970, 385 billion eurodollars were held in offshore bank accounts.^[6] These deposits were lent on as U.S. dollar loans to businesses in other countries where interest rates on loans were perhaps much higher in the local currency, and where the businesses were exporting to the U.S. and receiving payment in dollars, thereby avoiding foreign exchange risk on their funding arrangements.

Several factors led eurodollars to overtake certificates of deposit (CDs) issued by U.S. banks as the primary private short-term money market instruments by the 1980s, including:^{[clarification needed]}

The successive balance of payments deficits of the United States, causing a net outflow of dollars;^[7]
Regulation Q, the U.S. Federal Reserve's ceiling on interest payable^[8] on domestic deposits during the high inflation of the 1970s^[9]
Eurodollar deposits were a cheaper source of funds because they were free of reserve requirements and deposit insurance assessments^[9]

Market size

In 1997, nearly 90% of all international loans were made this way.^[10]

In December 1985, the Eurodollar market was estimated by J.P. Morgan & Co. Guaranty bank to have a net size of 1.668 trillion.^[11]

In 2016, the Eurodollar market size was estimated at around 13.833 trillion.^[12]

Eurodollar futures contracts

The Eurodollar futures contract was launched in 1981. It was the first cash-settled futures contract.^[13] It traded on the Chicago Mercantile Exchange.^[14] Eurodollar futures were an instrument used to wager on Federal Reserve policy or to hedge the direction of short-term interest rates. In April 2023, after the Libor scandal, they were eliminated and transitioned to SOFR-based contracts.^[15]^[16]

Sweeps

In United States banking, Eurodollars are used for what are known as "sweeps". Until 21 July 2011, banks were not allowed to pay interest on corporate transactional accounts. To accommodate larger businesses, banks may automatically transfer, or sweep, funds from a corporation's checking account into an overnight investment option to effectively earn interest on those funds. Banks usually allow these funds to be swept either into money market funds, or alternately they may be used for bank funding by transferring to an offshore branch of a bank. Today, commercial banks continue to offer many forms of sweep services which tend to give a higher rate of return whilst smaller entities may use a sweep account simply out of convenience.

References

^ "THE NATURE OF THE EURODOLLAR" (PDF). Federal Reserve Bank of Richmond. 1998.
^ "Who Is Borrowing and Lending in the Eurodollar and Selected Deposit Markets?". Federal Reserve Bank of New York. 13 May 2024.
^ ^a ^b Garson, Barbara (2001). Money Makes the World Go Around. Penguin Books. p. 29. ISBN 0-670-86660-1.
^ ^a ^b "Adam Smith" (George J.W. George) (1982). Paper Money. London: Macdonald & Co. p. 122. ISBN 0-356-08573-2.
^ Schenk, Catherine R. (April 1998). "The Origins of the Eurodollar Market in London: 1955–1963" (PDF). Explorations in Economic History. 35 (2): 221–238. doi:10.1006/exeh.1998.0693.
^ William Brittain-Catlin: Offshore – The Dark Side of the Global Economy; Farrar, Straus and Giroux, 2005, p.8-9
^ Schenk, p.223 "the supply of Eurodollar facilities is interpreted as a response to a demand for a new way to accommodate US$ surpluses"
^ Regulation Q, Schenk, p.222
^ ^a ^b Galen Burghardt (2003). The Eurodollar Futures and Options Handbook. New York: McGraw-Hill. ISBN 0-07-141855-5.
^ Shaxson, Nicholas (2011). Treasure Islands. London: The Bodley Head. ISBN 978-1-84792-110-9.
^ Harold G. Vatter and John F. Walker (editors): History of the U.S. Economy since World War II; Sharpe, 1996.
^ Nedbank (September 2016). "The rise and fall of the eurodollar system" (PDF).
^ Maidenberg, H.J. (14 December 1981). "Commodities; New Eurodollar Market". The New York Times.
^ "Market Begins Trading In Eurodollar Futures". The New York Times. Associated Press. 10 December 1981.
^ Chen, Vivien Lou (14 April 2023). "Goodbye, Eurodollar futures. Here's why the once- dominant derivatives contract is going away". MarketWatch.
^ Stanton, Elizabeth (14 April 2023). "The Once-Mighty Eurodollar Futures Contract Fades Away". Bloomberg News.

[1] "THE NATURE OF THE EURODOLLAR" (PDF). Federal Reserve Bank of Richmond. 1998.

[2] "Who Is Borrowing and Lending in the Eurodollar and Selected Deposit Markets?". Federal Reserve Bank of New York. 13 May 2024.

[Garson_2001-3] Garson, Barbara (2001). Money Makes the World Go Around. Penguin Books. p. 29. ISBN 0-670-86660-1.

[smith-4] "Adam Smith" (George J.W. George) (1982). Paper Money. London: Macdonald & Co. p. 122. ISBN 0-356-08573-2.

[5] Schenk, Catherine R. (April 1998). "The Origins of the Eurodollar Market in London: 1955–1963" (PDF). Explorations in Economic History. 35 (2): 221–238. doi:10.1006/exeh.1998.0693.

[6] William Brittain-Catlin: Offshore – The Dark Side of the Global Economy; Farrar, Straus and Giroux, 2005, p.8-9

[7] Schenk, p.223 "the supply of Eurodollar facilities is interpreted as a response to a demand for a new way to accommodate US$ surpluses"

[8] Regulation Q, Schenk, p.222

[Burghardt-9] Galen Burghardt (2003). The Eurodollar Futures and Options Handbook. New York: McGraw-Hill. ISBN 0-07-141855-5.

[Shaxson-10] Shaxson, Nicholas (2011). Treasure Islands. London: The Bodley Head. ISBN 978-1-84792-110-9.

[11] Harold G. Vatter and John F. Walker (editors): History of the U.S. Economy since World War II; Sharpe, 1996.

[12] Nedbank (September 2016). "The rise and fall of the eurodollar system" (PDF).

[13] Maidenberg, H.J. (14 December 1981). "Commodities; New Eurodollar Market". The New York Times.

[14] "Market Begins Trading In Eurodollar Futures". The New York Times. Associated Press. 10 December 1981.

[15] Chen, Vivien Lou (14 April 2023). "Goodbye, Eurodollar futures. Here's why the once- dominant derivatives contract is going away". MarketWatch.

[16] Stanton, Elizabeth (14 April 2023). "The Once-Mighty Eurodollar Futures Contract Fades Away". Bloomberg News.

[1]

[2]

[3]

[4]

[5]

[6]

[7]

[8]

[9]

[10]

[11]

[12]

[13]

[14]

[15]

[16]

@@ Line 1: / Line 1: @@
+{{Short description|U.S. dollars held in banks outside the U.S.}}
-{{for|the currency of the European Union|Euro}}
+{{About|the time deposits|the currency of the European Union|Euro}}
-'''Eurodollars''' are [[time deposits]] denominated in [[U.S. dollar]]s at [[bank]]s outside the [[United States]], and thus are not under the [[jurisdiction]] of the [[Federal Reserve]]. Consequently, such deposits are subject to much less regulation than similar deposits within the U.S., allowing for higher margins. The term was originally coined for U.S. dollars in European banks, but it expanded over the years to its present definition—a U.S. dollar-denominated deposit in Tokyo or Beijing would be likewise deemed a Eurodollar deposit. There is no connection with the [[euro]] currency or the [[eurozone]].
+{{Use dmy dates|date=December 2020}}
-More generally, the ''euro-'' prefix can be used to indicate any currency held in a country where it is not the official currency: for example, '''euroyen''' or even '''euroeuro'''.<ref>[http://www.riskglossary.com/link/eurodollar_deposit.htm Eurodollar Deposit] is an overview article</ref>
+'''Eurodollars''' are [[U.S. dollar]]s held in [[time deposit]] accounts in [[bank]]s outside the [[United States]]. The term was originally applied to U.S. dollar accounts held in banks situated in Europe, but it expanded over the years to cover US dollar accounts held anywhere outside the U.S. Thus, a U.S. dollar-denominated deposit in Tokyo or Beijing would likewise be deemed a Eurodollar deposit (sometimes an '''Asiadollar'''). More generally, the ''euro-'' prefix can be used to indicate any currency held in a country where it is not the official currency, broadly termed "[[eurocurrency]]", for example, '''Euroyen''' or even '''Euroeuro'''.
+Eurodollars have different regulatory requirements than dollars held in U.S. banks. Eurodollars can be riskier than assets held in U.S. banks, which include at least partial deposit insurance, and as a result, demand a higher interest rate.<ref>{{Cite web | url=https://www.richmondfed.org/~/media/richmondfedorg/publications/research/special_reports/instruments_of_the_money_market/pdf/chapter_05.pdf | title=THE NATURE OF THE EURODOLLAR | work=[[Federal Reserve Bank of Richmond]] | year=1998}}</ref>
-==History==
+The use of Eurodollars has been on a consistent decline.<ref>{{Cite news | url=https://libertystreeteconomics.newyorkfed.org/2024/05/who-is-borrowing-and-lending-in-the-eurodollar-and-selected-deposit-markets/ | title=Who Is Borrowing and Lending in the Eurodollar and Selected Deposit Markets? | work=[[Federal Reserve Bank of New York]] | date=May 13, 2024}}</ref>
-Gradually, after the [[Second World War]], the quantity of [[United States dollar|U.S. dollars]] outside the [[United States]] increased enormously, as a result of both the [[Marshall Plan]] and imports into the U.S., which had become the largest consumer market after [[World War II]].
+There is no connection with the [[euro]] currency of the [[European Union]].
-As a result, enormous sums of [[United States dollar|U.S. dollars]] were in the custody of foreign banks outside the United States.  Some foreign countries, including the [[Soviet Union]], also had deposits in U.S. dollars in American banks, granted by certificates.
+== History ==
-During the [[Cold War]] period, especially after the invasion of [[Hungary]] in 1956, the Soviet Union feared that its deposits in North American banks would be frozen as a retaliation. It decided to move some of its holdings to the [[Moscow Narodny Bank]], a Soviet-owned bank with a [[United Kingdom|British]] charter. The British bank would then deposit that money in the US banks. There would be no chance of confiscating that money, because it belonged to the British bank and not directly to the Soviets. On February 28, 1957, the sum of $800,000 was transferred, creating the first eurodollars. Initially dubbed "Eurbank dollars" after the bank's [[Teleprinter|telex]] address, they eventually became known as "eurodollars"<ref name="smith">{{cite book
+After [[World War II]], the quantity of physical [[U.S. dollar]] [[banknote]]s outside the [[United States]] increased significantly, as a result of both the dollar funding of the [[Marshall Plan]] and from dollar proceeds of European exports to the U.S., which had become the largest consumer market.
-|isbn=0356085732
+As a result, large amounts of U.S. dollar banknotes were in the custody of foreign banks outside the United States. Some foreign countries, including the [[Soviet Union]], also had deposits in U.S. dollars in American banks, evidenced by  certificates of deposit. Various narrations are given of the creation of the first eurodollar account, but most trace back to Communist governments keeping dollar deposits abroad.
+In one version, the first eurodollar account was created in France in favour of [[History of the People's Republic of China|Communist China]], which in 1949 managed to move almost all of its U.S. dollar banknotes to the Soviet-owned [[Banque Commerciale pour l'Europe du Nord – Eurobank|Banque Commerciale pour l'Europe du Nord]] in Paris before the United States froze its remaining U.S. situated assets during the Korean War.<ref name="Garson 2001"/>
+In another version, the first eurodollar account was created by an English bank in favour of the Soviet Union during the [[Cold War]], following the [[Hungarian Revolution of 1956|invasion of Hungary in 1956]], as the Soviet Union feared that its deposits in North American banks would be frozen as a sanction. It therefore decided to move some of its U.S. dollars held directly in North American banks to the [[Moscow Narodny Bank Limited|Moscow Narodny Bank]], an English limited liability company registered in London in 1919, whose shares were owned by the Soviet Union. The English bank would then re-deposit the dollars into U.S. banks. Thus although in reality the dollars never left North America, there would be no chance of the U.S. confiscating that money, because now it belonged legally to the British bank and not directly to the Soviets, the [[beneficial owner]]s. Accordingly, on 28 February 1957, the sum of $800,000 was duly transferred, creating the first eurodollars. Initially dubbed "Eurobank dollars" after the bank's [[Teleprinter|telex]] address, they eventually became known as "eurodollars"<ref name="smith">{{cite book
+|isbn=0-356-08573-2
 |author= "Adam Smith" (George J.W. George)
 |title=Paper Money
@@ Line 18: / Line 26: @@
 |year=1982
 |pages=122
-|authorlink=George Goodman}}</ref> as such deposits were at first held mostly by [[Europe]]an banks and [[financial institution]]s.<ref name="smith"/> A major role was played by [[City of London]] banks, as the [[Midland bank]], now [[HSBC]], and their offshore [[Holding Companies]]. By the end of 1970 385,000M eurodollars were booked offshore <ref>William Brittain-Catlin: Offshore – The Dark Side of the Global Economy; Farrar, Strauss and Giroux, 2005, p.8-9</ref>. These deposits were lent on as US dollar loans to businesses in other countries where interest rates on loans were perhaps much higher in the local currency, and where the businesses were exporting to the USA and being paid in dollars, thereby avoiding [[currency risk]].
+|author-link=George Goodman}}</ref> as such deposits were at first held mostly by [[Europe]]an banks and [[financial institution]]s.<ref name="smith"/> [[City of London]] banks, such as [[Midland Bank]], now part of [[HSBC]], and their offshore [[holding company|holding companies]]<ref>{{Cite journal|last=Schenk|first=Catherine R.|date=April 1998|title=The Origins of the Eurodollar Market in London: 1955–1963|url=https://www.sfu.ca/~poitras/EEH_Eurodollar_98.pdf|journal=Explorations in Economic History|volume=35|issue=2|pages=221–238 |doi=10.1006/exeh.1998.0693 }}</ref> also played a major role in holding the deposits.
+In the mid-1950s, Eurodollar trading and its development into a dominant world currency began when the Soviet Union wanted better interest rates on their Eurodollars and convinced an Italian banking cartel to give them more interest than could have been earned if the dollars were deposited in the U.S. The Italian bankers then had to find customers ready to borrow the Soviet dollars and pay above the U.S. legal interest-rate caps for their use, and were able to do so; thus, Eurodollars began to be used increasingly in global finance.<ref name="Garson 2001">{{cite book|last=Garson|first=Barbara|title=Money Makes the World Go Around|year=2001|publisher=Penguin Books|isbn=0-670-86660-1|page=[https://archive.org/details/moneymakesworldg00gars/page/29 29]|url=https://archive.org/details/moneymakesworldg00gars/page/29}}</ref>
-Several factors led Eurodollars to overtake certificates of deposit (CDs) issued by U.S. banks as the primary private short-term money market instruments by the 1980s, including:
-* The successive [[Bretton Woods system#The U.S. balance of payments crisis .281958.E2.80.9368.29|commercial deficits]] of the [[United States]]
+By the end of 1970, 385 billion eurodollars were held in offshore bank accounts.<ref>William Brittain-Catlin: Offshore – The Dark Side of the Global Economy; Farrar, Straus and Giroux, 2005, p.8-9</ref> These deposits were lent on as U.S. dollar loans to businesses in other countries where interest rates on loans were perhaps much higher in the local currency, and where the businesses were exporting to the U.S. and receiving payment in dollars, thereby avoiding [[foreign exchange risk]] on their funding arrangements.
-* The U.S. Federal Reserve's ceiling on domestic deposits during the high inflation of the 1970s<ref name="Burghardt">{{cite book
-|isbn=0071418555
+Several factors led eurodollars to overtake [[Certificate of deposit|certificates of deposit]] (CDs) issued by U.S. banks as the primary private short-term money market instruments by the 1980s, including:{{clarify|April 2022, clarify effects, too vague|date=April 2022}}
+* The successive [[Bretton Woods system#The U.S. balance of payments crisis .281958.E2.80.9368.29|balance of payments deficits]] of the [[United States]], causing a net outflow of dollars;<ref>Schenk, p.223 "the supply of Eurodollar facilities is interpreted as a response to a demand for a new way to accommodate US$ surpluses"</ref>
+* Regulation Q, the U.S. Federal Reserve's ceiling on interest payable<ref>Regulation Q, Schenk, p.222</ref> on domestic deposits during the high inflation of the 1970s<ref name="Burghardt">{{cite book
+|isbn=0-07-141855-5
 |author=Galen Burghardt
 |title=The Eurodollar Futures and Options Handbook
@@ Line 29: / Line 41: @@
 |location=New York
 |year=2003
+|url=https://archive.org/details/eurodollarfuture0000burg
 }}</ref>
 * Eurodollar deposits were a cheaper source of funds because they were free of reserve requirements and deposit insurance assessments<ref name="Burghardt"/>
-==Market size==
+== Market size ==
+In 1997, nearly 90% of all international loans were made this way.<ref name="Shaxson">{{cite book| isbn=978-1-84792-110-9| first=Nicholas | last=Shaxson| title=Treasure Islands| publisher=The Bodley Head| location=London| year=2011}}</ref>
-By Dec. 1985 the [[Eurocurrency]] market was estimated by [[Morgan]] Guarantee bank to have a net size of 1,668B, of which 75% are likely eurodollars <ref>Harold G. Vatter and John F. Walker (editors): History of the U.S. Economy since World War II;  Sharpe, 1996.</ref>  . since it is not responsible to any government agency its growth is hard to estimate. The Eurodollar market is by a wide margin the largest source of global finance. In 1997, nearly 90% of all international loans were made this way .<ref name="Shaxson">{{cite book
-|isbn=9781847921109
-|author=Nicholas Shaxson
-|title=Treasure Islands
-|publisher=The Bodley Head
-|location=London
-|year=2011
-}}</ref>
+In December 1985, the Eurodollar market was estimated by [[J.P. Morgan & Co.]] Guaranty bank to have a net size of 1.668 trillion.<ref>Harold G. Vatter and John F. Walker (editors): History of the U.S. Economy since World War II; Sharpe, 1996.</ref>
-==Futures contracts==
-The Eurodollar futures contract refers to the financial [[futures contract]] based upon these deposits, traded at the [[Chicago Mercantile Exchange]] (CME).
-Eurodollar futures are a way for companies and banks to lock in an interest rate today, for money it intends to borrow or lend in the future.<ref>[[Wikinvest:Eurodollar futures|Eurodollar futures on Wikinvest]]</ref> Each CME Eurodollar futures contract has a notional or "face value" of $1,000,000, though the [[Leverage (finance)|leverage]] used in futures allows one contract to be traded with a [[Margin (finance)|margin]] of about one thousand dollars.<ref>http://www.cmegroup.com/wrappedpages/clearing/pbrates/performancebond.html?group=CME%20INTEREST%20RATE%20FUTURES&type=OutrightRates&h=2&reporttype=marginrate</ref>
+In 2016, the Eurodollar market size was estimated at around 13.833 trillion.<ref>{{cite web |url=https://www.nedbank.co.za/content/dam/nedbank-crp/reports/Strategy/NeelsAndMehul/2016/September/TheRiseAndFallOfTheEurodollarSystem_160907.pdf |title=The rise and fall of the eurodollar system |last=Nedbank | date=September 2016}}</ref>
-The minimum fluctuation in a Eurodollar contract is one-quarter of one [[basis point]] (0.0025% = $6.25 per contract) in the nearest expiring contract month, and one-half of one basis point (0.005% = $12.50 per contract) in all other contract months. <ref>Cannon Trading, Inc. [http://www.cannontrading.com/futures-market-eurodollar-futures.php Eurodollar Futures Trading Contract Specifications]. Accessed July 10, 2011</ref> Trading in Eurodollar futures is extensive, and the market for them tends to be very [[Market liquidity|liquid]].
+==Eurodollar futures contracts ==
-CME Eurodollar futures prices are determined by the market’s forecast of the 3-month [[United States dollar|USD]] [[London Interbank Offered Rate|LIBOR]] [[interest rate]] expected to prevail on the settlement date. The settlement price of a contract is defined to be 100.00 minus the official [[British Bankers Association]] fixing of 3-month LIBOR on the contract settlement date. For example, if 3-month LIBOR sets at 5.00% on the contract settlement date, the contract settles at a price of 95.00.<ref>{{cite web|title=Eurodollar Futures Contract Specification|accessdate=October 8, 2009|publisher=[[Chicago Mercantile Exchange]]|url=http://www.cmegroup.com/trading/interest-rates/stir/eurodollar_contract_specifications.html}}</ref>
+The Eurodollar futures contract was launched in 1981. It was the first cash-settled futures contract.<ref>{{cite news |last1=Maidenberg |first1=H.J. |title=Commodities; New Eurodollar Market |url=https://www.nytimes.com/1981/12/14/business/commodities-new-eurodollar-market.html  |work=[[The New York Times]] |date=14 December 1981}}</ref> It traded on the [[Chicago Mercantile Exchange]].<ref>{{Cite news | url=https://www.nytimes.com/1981/12/10/business/market-begins-trading-in-eurodollar-futures.html | title=Market Begins Trading In Eurodollar Futures | agency=[[Associated Press]] | work=[[The New York Times]] | date=December 10, 1981 | url-access=limited}}</ref> Eurodollar futures were an instrument used to wager on [[Federal Reserve]] policy or to hedge the direction of short-term interest rates. In April 2023, after the [[Libor scandal]], they were eliminated and transitioned to [[SOFR]]-based contracts.<ref>{{Cite news | url=https://www.marketwatch.com/story/goodbye-eurodollar-futures-heres-why-the-once-dominant-derivatives-contract-is-going-away-adc113a2 | title=Goodbye, Eurodollar futures. Here’s why the once- dominant derivatives contract is going away. | first=Vivien Lou | last=Chen | work=[[MarketWatch]] | date=April 14, 2023 | url-access=limited}}</ref><ref>{{Cite news | url=https://www.bloomberg.com/news/articles/2023-04-13/the-once-mighty-eurodollar-futures-contract-will-soon-be-no-more | title=The Once-Mighty Eurodollar Futures Contract Fades Away | first=Elizabeth | last=Stanton | work=[[Bloomberg News]] | date=April 14, 2023 | url-access=subscription}}</ref>
+== Sweeps ==
-=== How the Eurodollar futures contract works ===
+{{update|section|date=October 2013}}
+In [[Banking in the United States|United States banking]], Eurodollars are used for what are known as "[[sweep account|sweeps]]". Until 21 July 2011, banks were not allowed to pay interest on corporate [[transactional account]]s. To accommodate larger businesses, banks may automatically transfer, or sweep, funds from a corporation's checking account into an overnight investment option to effectively earn interest on those funds. Banks usually allow these funds to be swept either into [[money market fund]]s, or alternately they may be used for bank funding by transferring to an offshore branch of a bank. Today, commercial banks continue to offer many forms of sweep services which tend to give a higher rate of return whilst smaller entities may use a sweep account simply out of convenience.
+==See also==
-For example, if on a particular day an investor buys a single three month contract at 95.00 (implied settlement LIBOR of 5.00%):
+*[[Eurobond (international)|Eurobond]]
+*[[Petroeuro]]
-* if at the close of business on that day, the contract price has risen to 95.01 (implying a LIBOR decrease to 4.99%), US$25 will be paid into the investor's margin account; or
+*[[Swap (finance)|Swap]]
-* if at the close of business on that day, the contract price has fallen to 94.99 (implying a LIBOR increase to 5.01%), US$25 will be deducted from the investor's margin account.
-On the settlement date, the settlement price is determined by the actual LIBOR fixing for that day rather than a market-determined contract price.
-=== Eurodollar futures contract as synthetic loan ===
-A single Eurodollar future is similar to a [[forward rate agreement]] to borrow or lend US$1,000,000 for three months starting on the contract settlement date. Buying the contract is equivalent to lending money, and selling the contract short is equivalent to borrowing money.
-Consider an investor who agreed to lend US$1,000,000 on a particular date for three months at 5.00% per annum (months are calculated on a 30/360 basis). Interest received in 3 months' time would be US$1,000,000 × 5.00% × 90 / 360 = US$12,500.
-* If the following day, the investor is able to lend money from the same start date at 5.01%, s/he would be able to earn US$1,000,000 × 5.01% × 90 / 360 = US$12,525 of interest. Since the investor only is earning US$12,500 of interest, s/he has lost US$25 as a result of interest rate moves.
-* On the other hand, if the following day, the investor is able to lend money from the same start date only at 4.99%, s/he would be able to earn only US$1,000,000 × 4.99% × 90 / 360 = US$12,475 of interest. Since the investor is in fact earning US$12,500 of interest, s/he has gained US$25 as a result of interest rate moves.
-This demonstrates the similarity. However, the contract is also different from a loan in several important respects:
-* In an actual loan, the US$25 per basis point is earned or lost ''at the end of the three-month loan, not up front''. That means that the profit or loss per 0.01% change in interest rate ''as of the start date of the loan'' (i.e., its [[present value]]) is less than US$25. Moreover, the present value change per 0.01% change in interest rate is ''higher'' in ''low'' interest rate environments and ''lower'' in ''high'' interest rate environments. This is to say that an actual loan has [[bond convexity|convexity]]. A Eurodollar future pays US$25 per 0.01% change in interest rate no matter what the interest rate environment, which means it does not have convexity. This is one reason that Eurodollar futures are not a perfect proxy for expected interest rates. This difference can be adjusted for by reference to the implied volatility of options on Eurodollar futures.
-* In an actual loan, the lender takes credit risk to a borrower. In Eurodollar futures, the principal of the loan is never disbursed, so the credit risk is only on the margin account balance. Moreover, even that risk is the risk of the [[Clearing house (finance)|clearinghouse]], which is considerably lower than even unsecured single-A credit risk.
-=== Other features of Eurodollar futures ===
-quarterly expirations and 4 serial expirations are listed in the Eurodollar contract.<ref name="Eurodollar Contract Specifications">[http://www.cme.com/clearing/clr/spec/contract_specifications_cl.html?product=ED CME Eurodollar Contract Specifications. Accessed 09 December 2007.]</ref>
-This means that on January 1, 2011, the exchange will list 40 quarterly expirations (March, June, September, December for 2011 through 2020), the exchange will also list another four serial (monthly) expirations (January, February, April, May 2011). This extends tradeable contracts over ten years, which provides an excellent picture of the shape of the [[yield curve]]. The front month contracts are among the most liquid futures contracts in the world, with liquidity decreasing for the further out contracts. Total [[open interest]] for all contracts is typically over 10 million.
-The CME Eurodollar futures contract is used to hedge [[interest rate swaps]]. There is an [[arbitrage]] relationship between the interest rate swap market, the [[Forward Rate Agreement]] market and the Eurodollar contract. CME Eurodollar futures can be traded by implementing a spread strategy among multiple contracts to take advantage of movements in the forward curve for future pricing of interest rates.
-==Sweeps==
-In [[Banking in the United States|United States Banking]], Eurodollars are a popular option for what are known as "[[sweep account|sweeps]]". By law,<ref name="Law scheduled for repeal">[[Checkable deposit#Interest|Repeal is set to become effective on July 21, 2011.]]</ref> banks aren't allowed to pay interest on corporate [[Checkable deposit|checking accounts]]. To accommodate larger businesses, banks may automatically transfer, or sweep, funds from a corporation's checking account into an overnight investment option to effectively earn interest on those funds. Banks usually allow these funds to be swept either into [[Money fund|money market mutual funds]], or alternately they may be used for bank funding by transferring to an offshore branch of a bank.
-== See also ==
-*[[Swaps]]
-*[[Forward Rate Agreement]]
-*[[LIBOR]]
 *[[TED spread]]
-*[[Eurocurrency]]
-*[[Petroeuro]]
-*[[Eurozone]]
-*[[Currencies related to the euro]]
-* The eurodollar is also a [[fictional currency]] used worldwide in the setting of [[Cyberpunk 2020]]
-== References ==
+==References==
 {{Reflist}}
+{{Dollar}}
-==Bibliography==
-* Boberski, David  '''Valuing Fixed Income Futures'''.  1st edition, 2006
-* Ratti, B. '''Comércio Internacional e Câmbio'''. 9ª Edição. [[São Paulo|São Paulo, Brazil]], Edições Aduaneiras, 1997
-* Sandroni, P. '''Novíssimo Dicionário de Economia'''. 5ª Edição. São Paulo, Editora Best Seller, 2000.
-==External links==
-* [http://www.bba.org.uk the British Bankers Association] compiles Libor rates earned on Eurodollars.
-* [http://www.cmegroup.com/trading/interest-rates/stir/eurodollar_learn_more.html CME website] on Eurodollar futures contract.
-{{dollar}}
-[[Category:Financial terminology]]
-[[Category:Basic financial concepts]]
+[[Category:International finance]]
-[[ca:Eurodollar]]
+[[Category:Money market instruments]]
-[[de:Eurodollar]]
-[[es:Eurodólares]]
-[[fr:Eurodollar]]
-[[id:Eurodolar]]
-[[lb:Eurodollar]]
-[[ja:ユーロカレンシー]]
-[[pl:Eurodolar]]
-[[pt:Eurodólar]]
-[[ru:Евродоллар]]
-[[uk:Євродолар]]
-[[zh:欧洲美元]]

v t e Currencies named dollar or similar
Circulating	Australian dollar Bahamian dollar Barbadian dollar Belize dollar Bermudian dollar Brunei dollar Canadian dollar Cayman Islands dollar Cook Islands dollar Eastern Caribbean dollar Fijian dollar Guyanese dollar Hong Kong dollar Jamaican dollar Kiribati dollar Liberian dollar Namibian dollar New Zealand dollar Samoan tālā Singapore dollar Solomon Islands dollar Surinamese dollar New Taiwan dollar Trinidad and Tobago dollar Tuvaluan dollar United States dollar
Circulating, but renamed	Chinese yuan Ethiopian birr Malaysian ringgit
Defunct	Antigua dollar British Columbia dollar British North Borneo dollar British West Indies dollar Ceylonese rixdollar Confederate States dollar Continental dollar Danish rigsdaler Danish West Indian daler Danish West Indian rigsdaler Dominican dollar Dutch rijksdaalder Greenlandic rigsdaler Grenadian dollar Hawaiian dollar Japanese occupation dollar Kiautschou dollar Malaya and British Borneo dollar Malayan dollar Mauritian dollar Mongolian dollar Nevisian dollar New Brunswick dollar Newfoundland dollar Norwegian rigsdaler Norwegian speciedaler Nova Scotian dollar Penang dollar Prince Edward Island dollar Puerto Rican dollar Rhodesian dollar Saint Kitts dollar Saint Lucia dollar Saint Vincent dollar Sarawak dollar Sierra Leonean dollar Slovenian tolar Spanish dollar Straits dollar Sumatran dollar Swedish riksdaler Old Taiwan dollar Texas dollar Trinidadian dollar Tobagonian dollar Zimbabwean dollar Zimbabwean dollar (2019–2024)
Noncirculating	Niue dollar Pitcairn Islands dollar
Conceptual	Eurodollar Petrodollar International dollar (Geary–Khamis dollar)
Virtual	Linden dollar Project Entropia Dollar
Fictional	Angus Bucks
Private	Calgary dollar Canadian Tire money Disney Dollars Liberty dollar Salt Spring dollar Toronto dollar
See also	Dollar sign Half dollar Quarter dollar Holey dollar Thaler Tolar Trade dollar Zimbabwean bond coins Zimbabwean bond notes