Eurodollar spreading

[cdcaveman]

My question relates to this.. i've read a bit about EuroDollar futures, and i understand the contract details, and i understand that the futures imply interest rates... so if you have a future at 95 dollars a year from right now , its implying a 5% interest rate.. My question is if you are trading spreads say 6 month or 3 month spreads when you make money on them how do you figure out how much of your PNL was the convergence and how much was the price going in your favor..
if your in a bear spread, short the curve, interest rates go up.. futures go down, all things being equal you should make money just on the convergence of the spread, and as well the direction relative to the front contract being correct as well.. how do you have any clue how much of either is your profit and loss..

The other question is.. Do you create a interest rate curve out of the implied interest rates from the eurodollar futures?

 

[Martinghoul]

Quote from cdcaveman:
My question relates to this.. i've read a bit about EuroDollar futures, and i understand the contract details, and i understand that the futures imply interest rates... so if you have a future at 95 dollars a year from right now , its implying a 5% interest rate.. My question is if you are trading spreads say 6 month or 3 month spreads when you make money on them how do you figure out how much of your PNL was the convergence and how much was the price going in your favor..
if your in a bear spread, short the curve, interest rates go up.. futures go down, all things being equal you should make money just on the convergence of the spread, and as well the direction relative to the front contract being correct as well.. how do you have any clue how much of either is your profit and loss..

The other question is.. Do you create a interest rate curve out of the implied interest rates from the eurodollar futures?

Your terminology isn't right. How do you define "convergence"? What's a "bear spread" in Eurodollars (there's no such thing)? What do you mean when you say "short the curve"?

The correct terminology is "steepener/flattener" (steepener = long nearer contract, short further contract). A spread can tighten or widen as the Eurodollar strip flattens or steepens.

You might want to rephrase your question in light of the above, as otherwise it's hard to understand what you mean.

As to the other question, yes, Eurodollar futures are used (among other instruments) to build a rate curve.

 

[cdcaveman]

Quote from Martinghoul:

Your terminology isn't right. How do you define "convergence"? What's a "bear spread" in Eurodollars (there's no such thing)? What do you mean when you say "short the curve"?

The correct terminology is "steepener/flattener" (steepener = long nearer contract, short further contract). A spread can tighten or widen as the Eurodollar strip flattens or steepens.

You might want to rephrase your question in light of the above, as otherwise it's hard to understand what you mean.

As to the other question, yes, Eurodollar futures are used (among other instruments) to build a rate curve.

thanks.. I actually have no clue.. i'm used to talking in terms of Crude oil spreads, or vix futures spreads.. I read some papers from the cmegroup and thats exactly where it got confusing to me...

you mean steeper? steepener? prices of Eurodollar goes up interest rates go down... vice versa... i don't understand how if you wanna express a view that is bullish on interest rates why you would buy the front contract and sell the back..


GE futures naturally move up towards 100 over time representing the zero coupon acquirement of value over time.. am i right there?

 

[cdcaveman]

Quote from Martinghoul:

Your terminology isn't right. How do you define "convergence"? What's a "bear spread" in Eurodollars (there's no such thing)? What do you mean when you say "short the curve"?

The correct terminology is "steepener/flattener" (steepener = long nearer contract, short further contract). A spread can tighten or widen as the Eurodollar strip flattens or steepens.

You might want to rephrase your question in light of the above, as otherwise it's hard to understand what you mean.

As to the other question, yes, Eurodollar futures are used (among other instruments) to build a rate curve.

when you talk about steepening and flattening are you referring to the interest rate curve derived from eurodollar futures prices?

 

[bone]

cd, IMHO, just model them off of price action and trade them just like you would any other spread product.

You'll like them - they trend very well and behave quite nicely. And they are stupidly cheap to carry overnight in terms of margin. Which is good because you'll need to hold them for months at a time. IMHO trading them at higher frequencies doesn't make much sense because of the incredibly modest daily trading ranges.

Oh, and on the exchange spreads the order books are ridiculously stacked. Huge stupid size.

 

[Martinghoul]

Quote from cdcaveman:
thanks.. I actually have no clue.. i'm used to talking in terms of Crude oil spreads, or vix futures spreads.. I read some papers from the cmegroup and thats exactly where it got confusing to me...

you mean steeper? steepener? prices of Eurodollar goes up interest rates go down... vice versa... i don't understand how if you wanna express a view that is bullish on interest rates why you would buy the front contract and sell the back..


GE futures naturally move up towards 100 over time representing the zero coupon acquirement of value over time.. am i right there?

So here's the thing... You need to think about the time dimension. Apart from the undoubtedly important question of whether rates rise or fall, there's also the almost equally important question of "when" do rates rise or fall. So, as an example, if you believe rates will stay low for a while, followed by rises, you would do what's called a "steepener". A steepener is where you buy the nearer contract (expecting rates to be at or below 100-price) vs selling the further contract (expecting rates to be at or above 100-price). Obviously, if you believe rates will be higher than 100-price at a given point in time in the future, you would just sell the corresponding contract.

GE futures naturally "roll" up or down to a price that's implied by the current LIBOR rate, assuming everything else stays equal. At the moment, that's arnd 99.76, rather than 100.

Quote from cdcaveman:
when you talk about steepening and flattening are you referring to the interest rate curve derived from eurodollar futures prices?

Yes, correct... I always think of these as yields and the whole thing as a curve.

 

[cdcaveman]

so aren't you in some sense deriving some of your profit from the accumulation of interest in a leveraged way through futures.. or is most of it all your PNL derived from interest rate changes? this is the part i truely am missing

 

[Martinghoul]

Quote from cdcaveman:
so aren't you in some sense deriving some of your profit from the accumulation of interest in a leveraged way through futures.. or is most of it all your PNL derived from interest rate changes? this is the part i truely am missing

If by "accumulation of interest" you mean "rolldown", then yes, but only if you're the right way around (and you're not accumulating anything). In this way, it's somewhat similar to buying longer-dated oil futures in a steeply backwardated oil futures curve.

 

[cdcaveman]

Quote from bone:

cd, IMHO, just model them off of price action and trade them just like you would any other spread product.

You'll like them - they trend very well and behave quite nicely. And they are stupidly cheap to carry overnight in terms of margin. Which is good because you'll need to hold them for months at a time. IMHO trading them at higher frequencies doesn't make much sense because of the incredibly modest daily trading ranges.

Oh, and on the exchange spreads the order books are ridiculously stacked. Huge stupid size.

there are very clear trends in the spreads... i've followed that h/m/u/z condor since the last thread..

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[cdcaveman]

Quote from Martinghoul:

If by "accumulation of interest" you mean "rolldown", then yes, but only if you're the right way around (and you're not accumulating anything). In this way, it's somewhat similar to buying longer-dated oil futures in a steeply backwardated oil futures curve.

well i'm just trying to wrap my head around how the convergence to spot works... it seems like to me you would sell a front contract and buy a back contract and play the convergence... EX... -U15/+Z15 spread...
"accumulation of interest" is a term i used for lack of a better term and a lack of understanding of where one derives there PNL in a GE futures spread.

in a steeply backward oil curve, you can measure risk over historical times of similar measure, keep a certain amount of liquidity to sustain more backwardation, and hold untill the curve starts to converge back to normal.. Of course the curve can go alot farther backwards then you realize, so liquidity measurement is super important and finding spots along the curve that naturally go more backwards to hedge helps to.. IE butterflys, Ratioed Condors etc..

it just seems looking at the GE futures prices, one would sell front buy back.. yet i keep hearing people talking about buying front and selling back... obviously i understand the inverse relationship between futures prices and the interest rate curve that is derived from it..
a long calender in GE futures is long short term interest rates, and short longer term interest rates..

short the front contract , prices go down = interest rates go up(long interest rates) & long the back contract price goes up, interest rate goes down. This obviously is an expression that tapering would be farther off then the futures are now implying.

so if your shorting the front , going long the back, you are expressing a view that near term futures prices will rise slower the your back contract. this could as well just be an expression of rolling off the curve from longer dated contract spreads turning into shorter dated contract spreads.. right?