Investors can take potential advantage of a range of trading strategies in the short- and medium-term interest rate markets by mainly employing highly-liquid options and futures on Eurodollar contracts. Eurodollar options and futures are traded on the world's largest commodities exchange, the Chicago Mercantile Exchange (CME).
Opportunities may arise as a result of policy decisions effected or implied by the central bank of the United States, the Federal Reserve. Policy decisions made by the 'Fed' are impacted by a variety of factors the most prominent being employment (or lack thereof) and the spectre of inflation. Today's economic climate is challenging to say the least, and we expect the Fed to keep short-term rates on hold for an "extended period"--perhaps well into next year and possibly beyond.
Our approach to trading is varied, and may be adjusted as short- and medium-term interest rates rise, fall or remain unchanged. As warranted, we may also choose to employ a variety of strategies with outright options, option spread positions or futures mainly in Eurodollars, but also possibly Treasury notes, bonds and Fed funds.
Among the more intriguing possibilities, in our experience, are attempts to capitalize on the price relationship, over time, between Eurodollar futures and the London Interbank Offered Rate (Libor). Libor is the rate at which banks lend to one another. Eurodollar futures contracts are represented in terms of price and each futures price corresponds to an implied 3-month Libor interest rate in US dollars.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Option prices may not move in lock-step with the underlying futures contract. Trading spread positions may not be less risky than trading long- or short positions. Past performance is not necessarily indicative of future results. Speculate with risk capital, defined as funds you can afford to lose without adversely affecting your lifestyle.