QE2 End May Fuel Eurodollar Futures

Chidem Kurdas

The Federal Reserve having wrapped up its quantitative easing,  interest rates become subject to forces pulling in opposite directions. This creates opportunity for trading short-term rates. One type of instrument used for this purpose is Eurodollar futures.

While interviewing specialists on the topic, I was impressed with the growth of this market.  They pointed out some distinctive attributes of interest rate futures. 

Eurodollar contracts may sound like a bet on the exchange-rate but that’s not what they are. Instead, they’re cash-settled bets on the future of LIBOR paid on US dollars. Trading and spreads are very sensitive to events like Federal Reserve announcements.

The people I talked with, Robert Almgren and Christian Hauff, co-founders of Quantitative Brokers, say that if interest rates start to rise with the end of QE2, there could be extreme volatility and speculation in the Eurodollar and volumes could grow a lot.

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