Trading in Eurodollar is unprecedented in the economy. Around the globe, people have started to trade in Eurodollars. To understand, what it is and how can you earn by trading in it, you first need to get the basic concept of what is a bond. In finance, bonds are the instruments that represent different amounts. These are fixed and the funds, cash, or loans received per bond in the currency that is mentioned on the bond. Debts and credits are usually transferred through bonds and therefore, they hold prime importance in financial sectors.
What is a Eurodollar?
A Eurodollar is a bond that is US-dollar dominated. That means the currency of the bond is US dollars. But it is issued outside the US or from an international bank in the US. If a bank is issuing Eurodollar it must not be a US national bank. The institution holding the bond must be foreign. It must not be in the US or the owner’s homeland. A time deposit is nothing but a bond deposited in an international bank. These bonds originated in London and are now widely used throughout the world.
A brief history of trading in Eurodollar began
After World War II, US dollars became common in the outside world because imports to the US were increased. The factor that accelerated it the most was the financial aid to Europe that was provided by the US. That is how London is known as the house of Eurodollars. After the war concluded, the cold war followed shortly. In the 1950s, the Soviet Union began exporting its revenues which were in dollars out of the US. Because they were afraid that the US would anytime block or overtake their financial assets.
What is LIBOR and why is it influential?
Trading in Eurodollars is always dependent on the LIBOR, the London Interbank Offer Rate. It is set the interest rate at which all the banks trade in the world market or lend to each other. This rate changes after three months. These rates are used by international banks when dealing with Eurodollar deposits.
Why is trading in Eurodollar so popular?
Since Eurodollars are the US dollars that exist or are used outside the state, they are not confined to the regulations. The federal reserve bank of the US cannot control the Eurodollar rate because it is sold outside its premises. Also, the Eurodollar can be exchanged at a lower rate than the actual US dollar, hence the trading is easy and beneficial.
Trading in Eurodollar
Trading Eurodollar futures is risky but if you are a lucky hedger or an expert, you can predict the falling or rising markets just right. By trading in Eurodollars futures, a bank or institution seals the current interest rate or LIBOR to buy money in the near future. That means if you are thinking to buy money 2 weeks later, but the interest rate is going good today, you can utilize Eurodollar futures to buy the bonds then in the present LIBOR.
How do Eurodollar futures contracts work?
So, if a person buys a bond at a set interest rate. At the close of the day, if the contract price rises, the calculated amount in Eurodollar per the LIBOR is added to the person’s account. On the contrary, if the price falls, the set amount will be deducted from the person’s account.