What is the Eurodollar Settlement Process (cash settled)

What is the Eurodollar Settlement Process?

Some futures contracts are cash-settled, others are settled via physical delivery.

Soybeans, for example, are physically-delivered as part of the contract terms. They settle with the exchange of actual physical soybeans or cash soybeans between buyer and seller.

Eurodollar futures however, are cash-settled. Buyers and sellers of Eurodollar futures contracts that hold their contracts through final settlement will be credited the difference, in cash, between what they paid for the contract and what they sold the contract at, if there is a profit. If there is a loss, their account will be debited cash.

It is CME Clearing, in conjunction with the FCMs (Futures commission merchant or broker), that makes sure trader accounts are debited and credited accordingly and that cash settlements are made in a timely and accurate fashion.

Eurodollar Settlement Process

Assume that in March, a trader bought March Eurodollar futures at a price of 98.75 when three-month LIBOR was trading at about 1.25 (using the IMM price quotation convention the Eurodollar futures price would be 98.75 (100.00 – 1.25 = 98.75).

The trader decides to hold onto the futures contract until the final settlement day (usually the third Monday of the expiration month). The final settlement is determined using the IMM price quote convention.

Final Settlement of an expiring contract shall be 100 minus the three-month Eurodollar interbank time deposit rate, determined by the ICE LIBOR setting administered by ICE Benchmark Administration Ltd, as first released on the second London bank business day immediately preceding the third Wednesday of the contract delivery month.

3 month LIBOR rate Eurodollar IMM price quote
1.00 99.00
1.25 98.75
2.50 97.50
3.15 96.85

Returning to our example, the three-month Eurodollar interbank time deposit rate according to the ICE LIBOR setting is 1.19. The final settlement is arrived at by subtracting the ICE LIBOR setting from 100.00.

100.00 – 1.19 = 98.81 = the final settlement price of the March Eurodollar settlement.

If the trader originally bought the futures at 98.750, and they settled at 98.810, the trader would make 12 ticks profit (a tick = .005 price points). Each tick is worth $12.50. So, the trader profits by $150.00 per contract.

The clearinghouse, working through the trader’s broker, will credit his account with $150.00 cash. And the losing side of the trade will have $150 cash debited from his account to finalize the cash settlement process.

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Peter Knight Advisor


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