Eurodollar Futures
Eurodollar Futures
• A Eurodollar is a dollar deposited in a bank outside the United States
• Eurodollar futures are futures on the 3-month Eurodollar deposit rate (same as 3-month LIBOR rate)
• One contract is on the rate earned on $1 million
• A change of one basis point or 0.01 in a Eurodollar futures quote corresponds to a contract price change of $25
• A Eurodollar futures contract is settled in cash
• When it expires (on the third Wednesday of the delivery month) the final settlement price is 100 minus the actual three month Eurodollar deposit rate
Macaulay Duration
The formula usually used to calculate a bond\'s basic duration is the Macaulay duration, which was created by Frederick Macaulay in 1938, although it was not commonly used until the 1970s. Macaulay duration is calculated by adding the results of multiplying the present value of each cash flow by the time it is received and dividing by the total price of the security. The formula for Macaulay duration is as follows:
Modified Duration
Modified duration is a modified version of the Macaulay model that accounts for changing interest rates. Because they affect yield, fluctuating interest rates will affect duration, so this modified formula shows how much the duration changes for each percentage change in yield. For bonds without any embedded features, bond price and interest rate move in opposite directions, so there is an inverse relationship between modified duration and an approximate 1% change in yield. Because the modified duration formula shows how a bond's duration changes in relation to interest rate movements, the formula is appropriate for investors wishing to measure the volatility of a particular bond. Modified duration is calculated as the following:
Definition of 'Immunization'
A strategy that matches the durations of assets and liabilities thereby minimizing the impact of interest rates on the net worth.
• A Eurodollar is a dollar deposited in a bank outside the United States
• Eurodollar futures are futures on the 3-month Eurodollar deposit rate (same as 3-month LIBOR rate)
• One contract is on the rate earned on $1 million
• A change of one basis point or 0.01 in a Eurodollar futures quote corresponds to a contract price change of $25
• A Eurodollar futures contract is settled in cash
• When it expires (on the third Wednesday of the delivery month) the final settlement price is 100 minus the actual three month Eurodollar deposit rate
Macaulay Duration
The formula usually used to calculate a bond\'s basic duration is the Macaulay duration, which was created by Frederick Macaulay in 1938, although it was not commonly used until the 1970s. Macaulay duration is calculated by adding the results of multiplying the present value of each cash flow by the time it is received and dividing by the total price of the security. The formula for Macaulay duration is as follows:
Modified Duration
Modified duration is a modified version of the Macaulay model that accounts for changing interest rates. Because they affect yield, fluctuating interest rates will affect duration, so this modified formula shows how much the duration changes for each percentage change in yield. For bonds without any embedded features, bond price and interest rate move in opposite directions, so there is an inverse relationship between modified duration and an approximate 1% change in yield. Because the modified duration formula shows how a bond's duration changes in relation to interest rate movements, the formula is appropriate for investors wishing to measure the volatility of a particular bond. Modified duration is calculated as the following:
Definition of 'Immunization'
A strategy that matches the durations of assets and liabilities thereby minimizing the impact of interest rates on the net worth.