Eurodollar spreading

Quote from Maverick74:

Well, yes and no. The front month strip really has no interest rate risk. So if you continue to roll you are fine. Think of the front month as a liquidity parking lot. I mean obviously if you are a bank and you are using the repo rates for financing and repo rates spike up, they are at risk of not being able to afford to roll or getting squeezed on a swap. But for you, the lone buyer of a 3 month strip in the front, you are not really risking anything other then opportunity cost. You could have always bought ICPT with that money. :)
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Mav,

What is ICPT?

The front month doesn't have interest rate risk?

Geez you lost me.. sorry..
 
Quote from Martinghoul:

Yes, but if you think about it, you will conclude that the above is, in fact, equivalent to agreeing to make a notional 3m loan at a future date at a particular price.

Well, that's exactly the discussion that's occurring now and which makes these things so interesting. As to the "dangerous endeavor", yes, you're probably right, unless you can seriously imagine the US turning into Japan. If you kept buying Euroyen or JGBs in the 90s, you'd be sipping pina coladas on a beach somewhere by now.
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Will I ever be able to connect agreeing to loan, as similar to loaning.. I don't know haha.. Doesn't make sense..

The only thing that keeps the US out of a Japan situation is the fact that the entire world can't afford for the US to become Japan.. In my opinion..

But as they say... Don't bet against the end of the world because it only happens once.. haha
 
Quote from Maverick74:

I don't really like how you are using the word convergence. I like to use that term in relation to two different products moving back towards value. What you are doing is buying the present discount value of a future cash flow, like a savings bond. Instead of getting a coupon for interest you are getting a discount on the principal based on the implied rate. So the convergence is not an "edge". Neither is the 10 bps I get paid on my checking account. :)
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I get what your saying here.. "Convergence" isn't relevant...

Present discount value of a future cash flow....

maybe like future present value of an investment...

so If the future value implies a cash flow.. You discount that future value to in present value terms.. such that what your really earning is the realization of the differential... Your realizing the discount..
 
Quote from cdcaveman:
Will I ever be able to connect agreeing to loan, as similar to loaning.. I don't know haha.. Doesn't make sense..

The only thing that keeps the US out of a Japan situation is the fact that the entire world can't afford for the US to become Japan.. In my opinion..

But as they say... Don't bet against the end of the world because it only happens once.. haha
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Think about it this way (somewhat simplified)...

You and I get together and we agree that you will lend to me and I will borrow from you a sum of $1mil for 3 months at a rate of 0.25% per annum. The loan will be finalized and signed on the 17th of March 2014 with the money to be delivered on the 19th of March 2014.

On the 17th of March we get together again and it turns out that the rate I am offered in the market on loans exactly like the one we agreed on (which is no longer in the future, but is happening right then and there) is 0.23% per annum. Obviously, I don't want to borrow at 0.25% from you, but I have made a promise. In order for you to release me from my promise, I will have to pay you the difference. In terms of actual money, this difference will be 0.02% applied to $1mil and also divided by 4 (since our rates are all per annum, whereas the loan was only for 3 months). If my arithmetic serves me, that's like $50 that I have to pay you.

What I have described above is equivalent to you buying one lot of the H14 Eurodollar contract at 99.75 (100 - 0.25), waiting until the contract matures at 99.77 and making 2 ticks. Instead of me, when trading Eurodollars your counterparty is the exchange.
 
Quote from Martinghoul:

Think about it this way (somewhat simplified)...

You and I get together and we agree that you will lend to me and I will borrow from you a sum of $1mil for 3 months at a rate of 0.25% per annum. The loan will be finalized and signed on the 17th of March 2014 with the money to be delivered on the 19th of March 2014.

On the 17th of March we get together again and it turns out that the rate I am offered in the market on loans exactly like the one we agreed on (which is no longer in the future, but is happening right then and there) is 0.23% per annum. Obviously, I don't want to borrow at 0.25% from you, but I have made a promise. In order for you to release me from my promise, I will have to pay you the difference. In terms of actual money, this difference will be 0.02% applied to $1mil and also divided by 4 (since our rates are all per annum, whereas the loan was only for 3 months). If my arithmetic serves me, that's like $50 that I have to pay you.

What I have described above is equivalent to you buying one lot of the H14 Eurodollar contract at 99.75 (100 - 0.25), waiting until the contract matures at 99.77 and making 2 ticks. Instead of me, when trading Eurodollars your counterparty is the exchange.
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I totally follow this.. We are trading a rate on a loan agreement.. no loan actually happens though.. no interest is realized, no carry, nothing.. just a change in the rate over time as dictated by the market which puts the position in the positive or negative...
 
Quote from cdcaveman:
I totally follow this.. We are trading a rate on a loan agreement.. no loan actually happens though.. no interest is realized, no carry, nothing.. just a change in the rate over time as dictated by the market which puts the position in the positive or negative...
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Precisely. It's an imaginary future loan (or a "notional" one, to use your term) that never actually gets consummated. Instead, when the time comes (i.e. either the contract matures or you unwind your position), you and the exchange agree to tear up your contract for a fee.

Once you frame it this way, you can actually think a lot more clearly about the whole idea of "risk premium", "rolldown" etc etc...
 
Now are you guys trading packs against stacks and the like... Or taking a lot of directional risk... I'm back to a little better understanding now.. For the moment haha
 
Quote from cdcaveman:

Now are you guys trading packs against stacks and the like... Or taking a lot of directional risk... I'm back to a little better understanding now.. For the moment haha
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Are you "sure" you understand? :)
 
Quote from Maverick74:

Are you "sure" you understand? :)
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Touche! I doubt my own doubt... I don't kid myself... I know I'll need to revisit things like I do in so many other ways!
 
GE futures naturally move up towards 100 over time representing the zero coupon acquirement of value over time.. am i right there?
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No there is no zero coupon, the price is already a projection of expiration, if the rate is 1% the price stay around 99,75 (a quarter) near expiration.

I hope this will help
 
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