The Eurodollar is any deposit in dollars outside of the United States. This money is not under the jurisdiction of the United States Federal Reserve, the 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. In other words, it is the medium of exchange most used in international transactions.
For this reason, globally, large investors and businessmen engaged in foreign trade need to save and / or finance themselves in the US currency.
Origin of the Eurodollar
The origin of the term Eurodollar is not related to the euro, but to the cold war. After the Second World War, dollar deposits began to be made in European banks, mainly by Chinese and Soviet investors.
These businessmen wanted to save in a stable currency like the North American one. However, they feared that their accounts in the American banking system would be confiscated. This, in retaliation for hostile actions by their governments such as the Soviet Union’s invasion of Hungary in 1956.
Eurodollar forward contracts
Eurodollar futures contracts are traded on the Chicago Mercantile Exchange (CME). These are transactions where banks set the interest rate today 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 Eurodollar forward contract for $ 10,000. Suppose that the monthly interest rate is today in January at 0.8% and a rate of 1% is agreed for a loan that will be granted in April.
If the interest rate shoots up above 1% in three months, 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.