The Eurodollar Futures And
Options Handbook
INTRODUCTION
Eurodollar trading volume is
exploding, with no end in sight tools phenomenal growth. The Eurodollar Futures and
Options Handbook provides traders and investors with the complete range of current
research on Eurodollar futures and options, now the most widely traded money market
contracts in the world. The only current book on this widely-followed topic, it features
chapters written by Eurodollar experts from JP Morgan, Mellon Capital, Merrill Lynch, and
other global trading giants, and will quickly become a required reference for all
Eurodollar F&O traders and investors.
FOREWORD
At a recent conference/1
remarked that I felt a little like the Forrest Gump of interest rate futures. One accident
after another has placed me in the company of people who have been innovative thinkers and
doers in the futures business, and it has been my good fortune that many of them have been
willing to work with me. I have, as a result, accumulated a long string of debts to people
and would like to take this opportunity to acknowledge them.
First, I would like to
express my thanks to Rick Kilcollin, who was a colleague of mine at the Federal Reserve
Board in Washington and who, when he became Chief Economist at the Chicago Mercantile
Exchange, freed me from a life of bureaucratic strife and brought me to Chicago in 1983.
Rick worked with Fred Arditti on the design of the Eurodollar futures contract, and it was
through my association with the Exchange membership and work on various Exchange
committees that I began to get an appreciation of what this market was all about.
Once in Chicago, I jumped
ship in 1986 to work for Morton Lane at Discount Corporation of New York Futures, and it
is to Morton that I may well owe the greatest debt. Morton is insatiably curious about the
way the world works and believes passionately that research and education provide the most
solid foundations for building customer relationships. He also assembled one of the finest
futures brokerage teams ever in the history of the business, and he expected all of his
senior sales people to be able to think and teach. As a result of his commitment to
research and his genius in recruiting, we were able to write and publish the original
Eurodollar Futures and Options with Probus in 1991. My coauthors on that volume were Terry
Belton, Morton Lane, Geoff Luce, and Rick McVey, each of whom brought a host of insights
to our understanding of Eurodollar futures and options.
All that remains of the
original volume appears here in chapter 1, which recounts the history of the Eurodollar
cash and derivatives markets. But the influence of my original coauthors pervades
everything. Terry taught me how to solve problems. Morton lived and breathed the markets
as they developed. Geoff was the original designer of what we called the "Short
End" money market report (which has morphed into the "Daily Zero to Ten"
report that you will find later in this book). Rick taught me the practical difference
between one-sided arbitrage (shopping for the best price) and two-sided arbitrage (using
the bank's balance sheet) and which was more important for keeping cash and futures rates
in line with one another.
Soon after the publication of
Eurodollar Futures and Options, Discount Corporation of New York Futures was sold to Dean
Witter, where we became Dean Witter Institutional Futures. It was here that I was able to
embark on a string of research projects that produced several of the chapters that make up
this book. The really serious work was done at Dean Witter, largely because we were able
to hire Bill Hoskins out of the Ph.D. program at the University of Chicago. Bill is one of
those living, breathing whizzes who can combine theoretical insight and understanding with
views of the world that traders understand.
Perhaps the high point of my
career in Eurodollar futures was my work with Bill Hoskins on the value of the convexity
bias in (or, as Bill would argue, not in) Eurodollar futures. A lot of people claimed to
know something about convexity, and Terry Belton and I had even written a piece called
"The Financing Bias in Eurodollar Futures" that covered the same ground in 1989.
Even so, it was Bill's particular insight that allowed us to present the problem the way
we have in "The Convexity Bias in Eurodollar Futures" (see chapter 7). He
combined his theoretical understanding of convexity with the way a trader would think
about the problem, and it was this combination that made the research so accessible to the
market. Bill also provided the key thinking behind "Measuring and Trading Term TED
Spreads" in chapter 11 and "Hedging Extension and Compression Risk in Callable
Agency Notes" in chapter 14.1 still call him whenever I need help with whatever
thorny problem I am wrestling with at the time.
I have learned from and been
helped by several other colleagues in research. These include: Niels Johnson, who
personifies positive gamma and whose programs still run; Lianyan Liu, who is a blindingly
fast thinker and problem solver; Scott Lyden, who brought great insight to our
understanding of Eurodollar options;
George Panos, who, more than
anyone I have known, loves to •tackle pricing and hedging questions and has been
invaluable in keeping our research grounded in the problems that vex our clients; Fred
Sturm, who has a marvelous turn of mind and a visual way with data that is a wonder to
behold; and Eric Zhang, who is another blindingly fast thinker and problem solver. I have
learned, too, from my colleagues in sales as well. Both Mike Baeatti and Kevin Ferry found
themselves pulled into research projects on Eurodollar options and the year-end turn, and
I am in debt to them both.
I would like to thank several
others for the help they have provided over the years. Jeff Johnson (Carr Futures) has
been tireless and faithful in working with data, charts, publication issues, and general
all-around work. Steve Youngren (Chicago Mercantile Exchange) was a colleague of mine in
research when I arrived there in 1983. He was then and is now part of the corporate memory
of the Exchange and is still just as generous with his time and energies as he was then.
Celeste Pretzel (Carr Futures) and Sandy Gartler (Carr Futures) helped us with some thorny
desktop publishing questions. And Sean Doyle and Sandy Sloane (both of Bank of America)
have always been willing to answer questions about the real workings of the swap market.
I have a special affection
for the Chicago Mercantile Exchange, and I am happy to say that they seem to have an
affectionate regard for me as well. In June 2002 I spoke with Peter Barker, Vice President
of Interest Rate Marketing at the CME, about this project and asked him if they could
support it. His immediate answer was yes, and at his urging, the CME's support was both
generous and immediate. It is my good fortune to know such people and that my friends at
the Mere think enough of this work that they were willing to publish the book jointly with
McGraw-Hill.
I am grateful, too, for my
position at Carr Futures, where I have been director of research for the past six years.
Never in my wildest dreams could I have imagined a working life like the one I have now;
it has given me the freedom and flexibility to undertake projects like this book. I have
enjoyed the complete support of my colleagues, both in research and in sales, and it is
only through their support that I have ever been able to get anything done at all.
And last, I would like to
thank Susan Kirshner. Susan's contributions are everywhere. She joined me at Discount
Futures in 1986 and was a colleague of mine in research for more than ten years. She
helped with the original research notes. She wrote code.
She helped teach our
classes. She is a co-author of two of the papers that appear in this volume. She prepared
the two chapters on contract specifications and the glossary. And it is only because of
her extraordinary ability and commitment to this project that The Eurodollar Futures and
Options Handbook has seen the light of day. Our objective in this book was to create a
volume that would combine basic tools with research applications and that would allow us
to include our collected research on Eurodollar futures in a single volume. And while the
idea was a simple one, its execution was not. Through sheer force of intellect, will, and
hard work, Susan has pulled together the separate pieces and imposed a beautiful sense of
cohesion and flow on the whole thing. One could not ask for more.
I hope that you enjoy the
fruits of our labor.
469 PAGES