The Eurodollar is any deposit in dollars outside the United States. This money is not under the jurisdiction of the US Federal Reserve. , entity that directs the monetary policy of that country.
Eurodollars represent large sums of money around the world because the dollar is the main reserve currency. That is, it is the medium of exchange mostly used in international transactions. For this reason, globally, large investors and entrepreneurs engaged in foreign trade need to save and / or finance themselves in the US currency.
The origin of the Eurodollar term is not related to the euro , but to the cold war. After World War II, dollar deposits began to be made in European banks, mainly by Chinese and Soviet investors.
These businessmen sought to save in a stable currency like the US. However, they feared that their accounts in the US banking system would be confiscated. This, in retaliation for hostile actions by their governments such as the invasion of the Soviet Union to Hungary in 1956.
Future contracts of Eurodollars
The futures Eurodollar traded on the Chicago Mercantile Exchange (CME). These are transactions where the banks set today the interest rate for a loan that will take place in a later period.
It should be noted that Eurodollar futures contracts represent a valuable tool for investors because it allows them to protect themselves from variations in interest rates.
For example, let’s look at the case of a future contract of Eurodollars for US $ 10,000. Assume that the monthly interest rate is 0.8% in January today and a 1% rate is agreed for a loan to be granted in April.
If the interest rate rises in three months above 1%, the debtor acquired the financing at a lower cost. However, if the rate falls below 1%, the business will be profitable for the creditor because it will receive more interest.