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I've been learning about trading futures markets and had a few basic questions.

The Dec-20 Eurodollar trades at 98.59 (i.e. by Dec-20 investors are expecting 3 month LIBOR rates to be 1.41%).

Now the notional on these contracts is $1million and you only need margin of $550. Which begs the question, why would any retail investor trade this product since its so highly leveraged. Is there a way to choose to take less leverage than that?

Since each tick is $12.50 am I right in thinking that if you did just go for the $550 initial margin payment then the contract would have to move 0.22% against you to wipe you out?

I'm just trying to ascertain if the $1M is simply the exposure that you get, or whether any fluctuations in the futures contract are marked against that large notional amount.

One final point, other than the fact that futures let you take delivery of the underlying if you choose to, why do people trade futures over options? Surely the option is more conservative as you know your downside risk ahead of time.

Thanks.

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An option has a purchase price while a future only has a margin deposit. Now a future can have a required delivery date but can be financially settled before the delivery date.

A Eurodollar future represents only the value of a change in interest rates of a dollar time-deposit in Europe. So in my view, a Eurodollar does not represent a loan value but is fundamentally a hedge of a loan's cost or profit against the effect of a change in interest rates.

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  • Right, it just seems like its a ridiculous amount of leverage, and since you only need a small price movement to wipe you out, i don't really see the point of the product (for retail). I mean obviously for large institutions that are hedging and the like it is good. – econexplorer Feb 9 '20 at 17:49
  • What is the amount of a million-dollar Eurodollar loan's interest-cost or interest-income between now and December ? That interest-cost or interest-expense is what is being hedged. – S Spring Feb 9 '20 at 17:54
  • What do you mean? The Dec-20 is trading at 98.59. – econexplorer Feb 9 '20 at 17:59
  • Using the current contract number of 98.305, the current interest rate is 1.695%. Then a million dollars at eleven months is about $15538 in interest cost. That's the amount that the December Eurodollar future is hedging if for eleven months. – S Spring Feb 9 '20 at 18:05

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