Explanation:
A Eurodollar futures contract is an interest rate futures contract on Eurodollars, which are U.S. dollars deposited outside of the U.S. (not euros/dollars). The underlying interest rate of the contract is the 3-month forward London Interbank Offered Rate (LIBOR). The face value of the contract is $1 million, and the price change in the futures contract is a minimum of $25, which is equal to the change of one tick or one basis point. This contract allows investors to hedge against interest rate risk, and its popularity can be attributed to its high liquidity and the transparency of the LIBOR.
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Q.698 According to recent data, the most frequently traded futures contract in the United States is the 3-month Eurodollar futures contract that is traded on the Chicago Mercantile Exchange (CME). Which of the following is the appropriate and complete definition of a Eurodollar futures contract?
A
It is the foreign currencies futures contract on euros/dollars. The underlying interest rate of the contract is the 3-month forward LIBOR.
B
It is the foreign currencies futures contract on euros/dollars. The underlying interest rate of the contract is the 3-month forward LIBOR and the 3-month U.S. risk-free rate.
C
It is the interest rate futures contract on Eurodollars or on the U.S. dollars deposited outside of the U.S. The underlying interest rate of the contract is the 3-month U.S. risk-free rate.
D
It is the interest rate futures contract on Eurodollars or on the U.S. dollars deposited outside of U.S. The underlying interest rate of the contract is the 3-month forward LIBOR.