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Eurodollar spreading
- Thread starter cdcaveman
- Start date
Quote from cdcaveman:
So you said you can trade the TED directly through futures or something.. instead of trading Ge and t-bills against each other separately.. how do you pulll that up in IB ?
They are implied spreads. Best executed through TT or CQG, not IB. Although IB might be able to do it, not completely sure.
Here is a good video on the TED spread.
<iframe width="420" height="315" src="//www.youtube.com/embed/mhTXNLwcpOk" frameborder="0" allowfullscreen></iframe>
Quote from Maverick74:
They are implied spreads. Best executed through TT or CQG, not IB. Although IB might be able to do it, not completely sure.
No. So let's make sure we understand what this is. The TED spread essentially captures the difference between a risk free rate and risk rate. Granted the risk rate is very low risk itself but still more risky then a risk free rate. LIBOR is the rate at which other commercial banks agree to lend to each other. It's not technically one rate. LIBOR is actually a survey of an avg rate from a list of banks. When credit freezes banks are not going to lend to each other anymore, or at least not at a low rate, so rates go up. But the government will lend. The liquidity is always with the Fed. So what the TED spread is showing you in reality is a measure of the liquidity gap between bank lending rates and government rates. I can't imagine what scenario would happen were governments couldn't lend but commercial banks would.
Now, let's make sure we understand this next point. Your long option DOES have risk. As you saw from that chart, you could have been long from much higher prices and held all the way down waiting for a pop. As that spread narrows from 70 bp to 60 to 30 to 15 you are losing money. Sure, it looks small in bp terms but how many of these bad boys would you have have on with such small margins. Probably a lot. So even a drop from 30 bp to 25 could really hurt.
My point being that it's the ultimate long option is that it doesn't decay the way a OTM put would decay and it is not going to run in your face the way a short ES position can (see recent ES chart).
Just was discussing this with my father... How are t-bills a measure of the willingness of the gov to lend... When they are an instrument of borrowing money.
I'll watch. I'm reading/watching everything everyone is posting.. This place is something I am extremely grateful for... Haaplu thankgiving
Quote from cdcaveman:
Just was discussing this with my father... How are t-bills a measure of the willingness of the gov to lend... When they are an instrument of borrowing money.
I'll watch. I'm reading/watching everything everyone is posting.. This place is something I am extremely grateful for... Haaplu thankgiving
QE? During a crisis the FED is "buying" securities or "lending" capital to the market. Or you could call it "providing liquidity". Pick your position. I should have said Fed vs gov't but same thing to me. In a panic, the "Fed" is essentially lowering rates while corporates are raising them. Hence the spread "widens".
There's a few differences...Quote from cdcaveman:
So obviously you could say pic March Eurodollars against 3 month t-bill futures.. There is obviously different pricing through the term strucutre.. you pick say jan14 GE against jan14 GTB , whats the difference.. whats the term structure risk against the other term structure risk
Firstly, the Jan14 t-bill matures in Jan2014, whereas the Jan14 ED contract settles to the 3m LIBOR fixing on 13Jan2014 (so the rate covers the 15Jan14-15Apr14 period).
Secondly, there's a spread between the two markets. A decent, albeit imperfect, proxy for this is the difference between LIBOR and FF rates.
Quote from Martinghoul:
There's a few differences...
Firstly, the Jan14 t-bill matures in Jan2014, whereas the Jan14 ED contract settles to the 3m LIBOR fixing on 13Jan2014 (so the rate covers the 15Jan14-15Apr14 period).
Secondly, there's a spread between the two markets. A decent, albeit imperfect, proxy for this is the difference between LIBOR and FF rates.
What are you referring to FF rates
Quote from Martinghoul:
There's a few differences...
Firstly, the Jan14 t-bill matures in Jan2014, whereas the Jan14 ED contract settles to the 3m LIBOR fixing on 13Jan2014 (so the rate covers the 15Jan14-15Apr14 period).
Secondly, there's a spread between the two markets. A decent, albeit imperfect, proxy for this is the difference between LIBOR and FF rates.
So do you build it with jan Tbills against Apr Eurodollars..
Fed Funds effective rate, in this case.Quote from cdcaveman:
What are you referring to FF rates
Nah, it's sorta complicated when you're this close to home and it's hard to find Eurodollar contracts with sufficient granularity. The most natural futures to trade the t-bills against would be FedFunds, as they lend themselves much more readily to this.Quote from cdcaveman:
So do you build it with jan Tbills against Apr Eurodollars..