What Is a Eurostrip?

A eurostrip, short for "eurodollar futures strip," is a type of interest rate derivative that allows the holder to hedge against changes in interest rates. It consists of buying a series of three-month futures contracts known as 澳洲幸运5官方开奖结果体彩网:eurodollars. Therefore, if a trader wishes to hedge their risk for one year, they would buy four coဣnsecutive eurodolla🔥r contracts, each lasting for three months.

Understanding Eurostrips

Eurostrips are a colloquial name used by 澳洲幸运5官方开奖结果体彩网:derivative traders to refer to a series of transactions involving eurodollar 澳洲幸运5官方开奖结果体彩网:futures contracts. Eurodollars are essentially U.S. dollar-denominated deposits held at foreign banks or at U.S. bank�♓�s' overseas branches.

As is so often the case in modern finance, there exists an active derivative market based on these eurodollar deposits. Specifically, ever since 1981, the 澳洲幸运5官方开奖结果体彩网:Chicago Mercantile Exchange (CME) has facilitated trading in eurodollar deposits using 澳洲幸运5官方开奖结果体彩网:cash-settled eurodollar futures contracts.

These contracts have as their 澳洲幸运5官方开奖结果体彩网:underlying asset eurodollar deposits with principal values of $1 million and maturity periods of three months. The value of these futures contracts fluctuates based on the three-month U.S. dollar 澳洲幸运5官方开奖结果体彩网:London ꩵInterbank Offered Rate (LIBOR). Therefore, traders can use eurodollar futures to hedge against or speculate ꦛon changes to interest rates.

Eurostrips are a derivative transaction in which the trader purchases a series of back-to-back eurodollar futures contracts. The length of the chain will vary depending on the trader's intentions. For instance, a trader wishing to hedge or speculate one year into the future would construct a eurostrip based on four eurodollar futu✤res (thre♊e months each, 12 months in total), a trader looking six months ahead would buy two futures contracts, and so on.

The end result of hedging using eurostrips is the same as that of using 澳洲幸运5官方开奖结果体彩网:interest rate swaps, but the two contracts are traded differently and have a different set of cash flows. One choice may be more desira🐼ble than another at a given time to meet a specific investment objective, or both may be used together. Eurostrips are popular because of their flexibility to be structured in many different ways to meet a variety of hedging needs.

Although eurostrips are most commonly used to hedge interest rate risks, they can also be used to speculate on LIBOR or on the shape of the 澳洲幸运5官方开奖结果体彩网:interest rate term structure.

Real World Example of a Eurostrip

To illustrate, suppose you operate a global 澳洲幸运5官方开奖结果体彩网:investment bank based in Paris, which holds U.S. dollar deposits in its European branches. You are unsure about the future direction of interest rates and are therefore eager to hedge against the foreign exchange risk associated with these dollar holding🧜s.

To hedge against this risk, you create a eurostrip position by taking a 澳洲幸运5官方开奖结果体彩网:long position in four consecutive eurodollar futures contracts. Because each contract lasts for three months, this eurostrip p𓆉osition effectively hedges your interest rate exposur𒁏e for one year.