Eurodollar Spread Betting
The Eurodollar is an interest-based financial product, similar to the UK Long Gilts or the US T-Bond, but for a shorter period of time, like Short Sterling. Because of the way that interest-based spread betting works, if you think that the interest rate for the Eurodollar is going up, you would place a short bet or sell; if you want to bet that the interest rate goes down, then you would buy a long bet.
The current rate for the three-month Eurodollar is 9928.75 – 9930.75. This means that the interest rate is 0.7125% – 0.6925%. Considering first that you may believe the Eurodollar interest rate is going down, you would open a long bet at 9930.75. Because this is an interest-based financial instrument, even if the interest rate goes to zero, the spread bet value cannot exceed 10,000, therefore you make a sizable bet of £50 per point.
If the interest rate does go down, and the Eurodollar price rises to 9956.50 – 9958.50, then you could close your bet for a profit. The bet will close at 9956.50, which is the equivalent of 0.435% interest.
The amount of your profit is based on the number of points you gained. The bet was placed at 9930.75, and closed at 9956.50, which gives a gain of 25.75 points. Your stake was £50 per point, therefore your total profit is £1287.50.
You must also consider that you may have bet in the wrong direction, and at some stage you will have to accept the losses and close your bet before you lose too much. Say the price dropped to 9921.0 – 9923.0, and you closed your bet. Now you can work out how much you lost.
The bet still went on at 9930.75, but this time it closed at 9921.0, so you lost 9.75 points. For your stake of £50 per point, you have lost £487.50.
Consider now the other case of going short on the Eurodollar. This means that you think the interest rate will rise, and the Eurodollar quote will fall. Suppose you place a bet of £20 per point at the original selling price of 9928.75.
First, assume that the bet goes in your direction and that you close it when the price has dropped to 9896.5 – 9898.5. As it is a short bet, it closes at the higher price of 9898.5. This works out to an interest rate of 1.015%. It is a good idea to work backwards from the spread betting prices, to see how realistic you feel the interest rate inferred by them is going to be. The number of points you have gained is 9928.75 less 9898.5, which is 30.25 points. For your £20 stake, this works out to a profit of £605.
Unfortunately, no one can predict with certainty which way the market will go, and it is possible that this bet will be a losing one. Say the price went up to 9936.5 – 9938.5, and you decided to close the bet and cut your losses. The bet closes at 9938.5, as it was a short bet.
The total number of points you lost is 9938.5-9928.75, which is 9.75. With a £20 stake, this amounts to £195.
How to Spread Bet the Eurodollar
The Eurodollar has nothing to do with the euro, and everything to do with the US currency. It originated more than 50 years ago when lots of dollars were sent outside of the US, and were held in European banks. This is because of the size of the US economy, and the Marshall Plan – the US was spending like a drunken sailor. The Soviet Union invented the concept of Eurodollars to ensure that any dollars they received could not be frozen by the then unreceptive US. The dollars were deposited in a Moscow bank, which then deposited them in a bank in the US. As the money belonged to a bank, and not to the Soviet Union, the US could not touch them.
Nowadays, the Eurodollar market is big business. The Eurodollar now refers to any dollar-denominated deposits held outside of the US, and the term includes deposits held worldwide, not just in the Europe. Because they are held outside the US, the funds escape regulation by the Federal Reserve Board, and this has cost advantages to the banks, allowing them to work on narrower margins. It is interesting to note that no dollars have to physically leave the US. Although the foreign bank will usually turn around the accepted deposits and lend them out, as part of its banking function, all it is really doing is recording a transfer of ownership of the money.
All this has led to a market in Eurodollar futures, which give companies, banks and others involved in international trade a way to lock in an interest rate today for money that they know they will borrow or lend in the future. It is this interest rate which you are betting on when you spread bet Eurodollars.
With that background, you can see that spread betting on the Eurodollars is a very similar concept to spread betting on any other interest based financial instrument, such as Short Sterling or UK Long Gilts. There is one principle that you must remember at all times – if you think the interest rate is going up, then you need to place a short or selling bet on the spread trade as the value will fall. If you want to bet that the interest rate will fall, then you take out a long bet on the Eurodollar.
The reason for this is explained by the way you bet on any interest financial instruments. The price quoted is 100 minus the interest percentage, so when one goes up the other goes down. In actual practice, the price is then multiplied by a hundred so that you have a reasonable number, just under 10,000, to bet on rather than having to deal with huge stakes and fractional shifts in value.
Just to make this clear, here is an example. Assume an interest rate of 2.5%. Taking this away from 100 you get 97.5. For this interest rate, you would see a spread bet quote of 9750. If it went up to 9800, that would indicate that the interest rate had fallen to 2%.
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