Eurodollar spreading
- Thread starter cdcaveman
- Start date
This is yet another flavor and another curve that sits somewhere between the Eurodollars and Treasuries. So you have three curves to play with, rather than 2.
Sweet, innit?
I am not suggesting you should trade FedFunds instead of t-bills, necessarily, although, like Mav says, you certainly could do this. FedFunds aren't as liquid as Eurodollars and don't go as far out (only 3yrs or so), but they're yet another instrument at your disposal.
And yes, like Mav says, it's a world with a whole lot of wrinkles and complexities. People do trade all these curves against each other (much less now than in the past, IMHO, but still) and play arnd the various minute kinks etc. Personally, I wouldn't suggest that anyone should be doing this or trading these things in a high-frequency fashion or anything of the sort.
All I am saying here is that it's worth getting familiar with this world to be able to choose the right instrument for the job. I use these mkts to express longer term macro-like views. And when I do that, it's good to know what the right expression is. Just my Z$2c...
Quote from Martinghoul:
This is yet another flavor and another curve that sits somewhere between the Eurodollars and Treasuries. So you have three curves to play with, rather than 2.
Sweet, innit?
I am not suggesting you should trade FedFunds instead of t-bills, necessarily, although, like Mav says, you certainly could do this. FedFunds aren't as liquid as Eurodollars and don't go as far out (only 3yrs or so), but they're yet another instrument at your disposal.
And yes, like Mav says, it's a world with a whole lot of wrinkles and complexities. People do trade all these curves against each other (much less now than in the past, IMHO, but still) and play arnd the various minute kinks etc. Personally, I wouldn't suggest that anyone should be doing this or trading these things in a high-frequency fashion or anything of the sort.
All I am saying here is that it's worth getting familiar with this world to be able to choose the right instrument for the job. I use these mkts to express longer term macro-like views. And when I do that, it's good to know what the right expression is. Just my Z$2c...
Originally Mav brought up the idea as a trade to go long a credit freeze... Sort of a cheap long put on risk assets... What kinds of long term views are you talking...
"Eurodollar Futures vs. 2-Year Treasury Futures (3:2) - 60% Spread Credit
Outright rates:
2-Year Note Futures: $500
Eurodollar Futures (2nd Year Red): $550
Spread credit: 60 percent
Margin before spread credit: $550 x 3 + $500 x 2 = $2,650
Margin after spread credit: $2,650 X 0.4 = $1,060 for a savings of $1,590
Eurodollar Cross Margining Efficiencies
Utilizing the CME Group proprietary SPAN margin system, cross margining
allows gains accruing to futures or options positions within an asset class
to be immediately available to meet the margin requirements of futures or
options positions that have sustained losses. This reduces your capital
requirements while freeing up more of your funds to pursue additional
profit opportunities.
To the right is an example of how cross margining with Eurodollars can
reduce your capital requirements.
"
is this a quick and dirty eurodollar / 2 year treasury spread? i found this on the eurodollar futures cme group page.. 3:2
Outright rates:
2-Year Note Futures: $500
Eurodollar Futures (2nd Year Red): $550
Spread credit: 60 percent
Margin before spread credit: $550 x 3 + $500 x 2 = $2,650
Margin after spread credit: $2,650 X 0.4 = $1,060 for a savings of $1,590
Eurodollar Cross Margining Efficiencies
Utilizing the CME Group proprietary SPAN margin system, cross margining
allows gains accruing to futures or options positions within an asset class
to be immediately available to meet the margin requirements of futures or
options positions that have sustained losses. This reduces your capital
requirements while freeing up more of your funds to pursue additional
profit opportunities.
To the right is an example of how cross margining with Eurodollars can
reduce your capital requirements.
"
is this a quick and dirty eurodollar / 2 year treasury spread? i found this on the eurodollar futures cme group page.. 3:2
Yes, being short Eurodollars vs one of the other two curves should work in a 2007-08 style blowup. You just need to be aware of the other factors that move these spreads.
As to longer term views, lemme give you an example. One of the more interesting things happening in US rates right now is the "hockey stick" shape of the curve. This is driven by a combination of Yellen and reasonably good econ data. If you wanted to do a trade that "fades" the current expectations in the mkt, you could buy something like the ED M5-M6-M7 fly. That's the sort of trade I am referring to.
Yeah, if you think about it, it's roughly in line with the example sizes I have given, i.e. 1570 or so Eurodollar contracts for 1000 2yr notes.
The multiplier is just giving you the rough total, right? So, like in my example, they just suggest that you take, say, 300 ED contracts for 200 2yr notes. They also suggest that you do it the "quick and dirty" way and just use the red pack. Which would mean, in this case, 75 contracts of each of the reds, i.e. Z14, H15, M15 and U15. Since the current front contract is very close to maturing and the reds will be H15, M15, U15 and Z15 from next week onwards, you might wanna use those instead.
This is a very interesting video.... take a look guys...
Blu Putnam, Chief Economist, CME Group
http://www.youtube.com/watch?v=WenRiIMrx4c&feature=c4-overview&list=UU1-7i1BQm8Ni0yOmK5vtlbQ
Blu Putnam, Chief Economist, CME Group
http://www.youtube.com/watch?v=WenRiIMrx4c&feature=c4-overview&list=UU1-7i1BQm8Ni0yOmK5vtlbQ
What you'll have in the quick 'n dirty case is some bucket risk. Most of the time it's not that significant, but there could be circumstances where you could lose money or make less than you should. Again key is to be aware of the trade off and make an informed decision.
If you wanna talk about the specifics, we could.