Credit Derivatives Futures Question

Finance Junkie
Posts: 41
Joined: Thu Oct 16, 2014 4:51 pm

Credit Derivatives Futures Question

Postby aroranidhi2004 » Sat May 07, 2016 11:05 pm

Hi Edupristine Team,

Can you please explain the rational for hedging floating rate liability with short position in the Eurodollar Future Contract and please explain difference between add on yield and discount yield?


Finance Junkie
Posts: 704
Joined: Wed Apr 09, 2014 6:28 am

Re: Credit Derivatives Futures Question

Postby edupristine » Mon May 09, 2016 5:58 am

Hi Nidhi

If Eurodollar futures were used to hedge against increasing LIBOR
rates, rather than implementing a naive hedge, the number of ED futures to
sell should be reduced by the present value factor between the current date,
and the date where the interest rate loan is to be paid back. As time evolves
the discount factor increases towards one, and the hedge strategy converges
towards selling 1 futures contract.
The strategy of selling a strip of ED futures contracts to hedge a floating
rate liability works well if there is sufficient liquidity in the distant ED futures
contracts. Since ED futures contracts are liquid contracts, even for distant
maturities, the trading of strips is very popular. If the hedge has to extend
out over time periods where actively traded ED futures contracts do not exist,
then an alternative hedging scheme can be established.

Yield Curve ED-Because Eurodollar futures are a mirror of the yield
curve, one may spread these contracts to take a
position on the relative changes associated with
long- and short-term yields, i.e., to speculate on the
shape of the yield curve.
If the yield curve is expected to steepen, the
recommended strategy is to “buy the curve” or “buy
a Eurodollar calendar spread” by purchasing near term
and selling longer-term or deferred Eurodollar

Return to “CFA Level II”



Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to and we will rectify it.