An interesting trade idea being floated on the wire is the Eurodollar. Very contrarian.
Eurodollar is a term that refers to any United States dollar held outside the U.S. banking system.
The underlying instrument in eurodollar futures is a eurodollar time deposit, having a principal value of $1 million with a three-month maturity.
The leverage used in futures allows one contract to be traded with margin of about $1,000.
The price of eurodollar futures reflects the interest rate offered on U.S. dollar–denominated deposits held in banks outside the United States.
More specifically, the price reflects the market gauge of the 3-month U.S. dollar LIBOR (London Interbank Offered Rate) interest rate anticipated on the settlement date of the contract.
Eurodollar = 100 – 3 month Libor yield.
So if Libor is 3% then Eurodollar = 97.
If the value of the Eurodollar futures contract moves by one basis point (.01%), it would equate into a $25.00 move in the contract value. If Eurodollar futures moved one hundred basis points, or 1%, it would equate to a $2,500 move in the value of the contract.
Rates rise Eurodollar drops. Rates drop Eurodollar rises.
The reasoning to get long Eurodollar is a lot of investors are currently short Eurodollars because of central bank tightening. Remember, rates rise and Eurodollar drops. Contrarian investors think that’s not appropriate at a time when we’re late in the business cycle and growth is declining. You could argue less than ideal times are ahead and monetary policy will loosen again. Also because the short end of the yield curve is more sensitive to rate moves and Eurodollar provides greater leverage and return potential if you think rates could decline over the next few years.