Eurodollar 5-Year E-mini Bundle

This product provides the economic equivalent of 20 quarterly Eurodollar expirations in a single contract. It represents an innovative packaging of the world’s most actively traded short-term interest rate futures contract – the Eurodollar.

Eurodollar 5-Year E-Mini Bundle futures provide a way to:

• Cost-effectively gain exposure to the critical 5-year point on the U.S. interest rate swap/Eurodollar futures curve
• Trade the same risk profile as interest rate swaps, but with the liquidity, familiarity and flexibility of Eurodollars
• Quickly and conveniently trade “TED” Spreads – Eurodollar futures traded against cash Treasuries or U.S. Treasury futures

Things to know:

• Each Eurodollar 5-Year E-mini Bundle:

• Has a $100,000 notional value and a one-basis point value of $50
• Is 1/10th the size of conventional 5-year Bundles
• Is fully fungible with Eurodollar futures – 10 E-mini Bundles equal one conventional contract
• Contracts trade exclusively on CME Globex
  • Around the clock, around the world
  • Complete price transparency and anonymity
  • Significant Eurodollar Pack and Bundle volume has migrated to this platform
• CME Clearing clears and settles all trades and guarantees counterparty creditworthiness

More to know

Eurodollar 5-Year E-mini Bundles:

• Are quoted in terms of price, not net change from the previous day’s settlement, in contrast to traditional Eurodollar Bundles

• This feature makes 5-Year E-mini Bundles easy to trade, chart, and compare with related fixed income products.
• On any exchange business day, 10 E-mini Bundles can be converted to a full-sized strip of 20 consecutive Eurodollar futures – at no charge!
• Daily settlement prices for 5-Year E-mini Bundles equal the average price of the 20 quarterly Eurodollar futures that make up the traditional 5-year Bundle.
  • This guarantees the economic equivalency of the E-mini Bundle and Eurodollar futures markets.
• We list 4 E-mini Eurodollar Bundles for trading with start dates corresponding to the next four quarterly Eurodollar expirations.

• Each expires on the third exchange business day prior to the third Wednesday of the quarterly contract month – generally a Friday.
• At expiration, each 5-Year E-mini Bundle “automagically” breaks into equivalent fractional Eurodollar futures positions in the 20 quarterly contracts that constitute the 5-year Bundle.
• The first contract in that strip typically expires on the following Monday, leaving the user with fractional positions in the remaining 19 contracts
• These fractional positions can be transformed into standard Eurodollar futures positions at the ten-to-one ratio on any business day.

E-mini Bundle Trade Example:

The December 2006 5-Year E-mini Bundle will cease trading on Friday, December 15, 2006. However, the lead December 2006 fractional Eurodollar contract created at expiration will still settle to the results of the British Bankers’ Association survey on Monday, December 18, 2006. Following that expiration, the remaining position would consist of 19 fractional Eurodollar contracts starting with the March 2007 and ending with the September 2011, which could then be converted to corresponding full sized contracts.

Diagram of E-mini Eurodollar Bundle

E-mini Bundle Liquidity

An array of market makers, all active participants in the Eurodollar Packs and Bundles, provide liquidity throughout the trading day in 5-year E-mini Bundles.

• E-mini Bundles trade exclusively on CME Globex where a large part of the Eurodollar Pack and Bundle volume has migrated in recent months.
• Nearly one-half of all bundles now trade electronically on Globex.
• Prices for E-mini Bundles are displayed at no charge, along with conventional Eurodollar Packs and Bundles and Eurodollar Options on Globex at www.cme.com/edge

High Correlation with 5-Year Interest Rate Swaps

The high correlations between the daily changes in yield on the conventional Eurodollar 5-Year Bundle versus the 5-Year U.S. Dollar swap rate indicate that the E-mini Bundle is an effective substitution for a 5-year swap, and offers much the same risk profile for 3-year through 10-year swap rates.

Correlations Between 5-year Eurodollar Bundle and U.S. Dollar Swap Rates (Feb. 14, 2006 - Aug. 14, 2006)* [update this with ’07 data]

*Source: Bloomberg

The story is even clearer with a picture...
  

Easier TED Spread Transactions

For more than 20 years, strips of Eurodollar futures traded against cash Treasuries or Treasury futures have served as the other side of the well-known “TED” spreads. With 5-Year E-mini Bundles, transacting these spreads is simpler than ever before. Weighting the spread by using the basis point value of one instrument versus another is easy.

• The value of a one-basis-point change in price/yield of the E-mini Bundle is always $50.
• A position of 100 Eurodollar 5-Year E-mini Bundles would equal $5,000 per basis point.
• As of August 14, 2006, the basis point value of the September 2006 5-Year Treasury future was $39.75 (that is $37.58 in the CTD cash Treasury divided by the conversion factor of 0.9453).
• That means an equivalent number of Treasury notes would be 126 contracts ($5,009 = $39.75 x 126).

The long-term relationship between the cash Treasuries and interest rate swaps for a conventional swap spread mirrors the Treasury to Bundle spreads.

Equivalent Exposure at a Lower Cost

Eurodollar 5-Year E-mini Bundles offer highly cost effective exposure to the fulcrum of the interest rate swap.

• They share the same efficient single product execution feature as conventional Eurodollar 5-Year Bundles.
• However, instead of clearing as twenty individual contracts like a conventional 5-Year Bundle, E-mini Bundles clear as a single contract.
• That means it takes only half as many E-mini Bundle contracts to achieve an equivalent basis point value of a conventional 5-Year Eurodollar Bundle.

A More Cost Effective Way to Manage Risk

Eurodollar 5-Year E-mini Bundles offer hedgers the advantage of executing a transaction just once—there is no need to roll a quarterly contract. Since at expiration a 5-Year E-mini Bundle becomes a strip of Eurodollar futures:

• The maturity of the position created by the bundle naturally decreases as quarterly contracts expire.
• A 5-year position automatically “rolls down the curve” to become a 4 ¾ year position with the expiration of the front quarterly contract.
• This removes a large transaction cost that hedgers and traders might have to bear when hedging with quarterly contracts such as 5-year U.S. Treasury or Swap contracts.

The E-mini Bundle matches the maturity of the asset it is meant to hedge. Howeve:r

• Positions in quarterly contracts such as Treasury or 5-year Swap contracts must be rolled until the underlying asset disappears or the hedge is lifted.
• If the underlying asset has a maturity of five years, a swap contract will prove less effective over time—ultimately necessitating a move to a strip of Eurodollars.
• With Treasury or swap positions, hedgers not only have to deal with the vagaries of quarterly spreads, but also have to face burdensome costs, even at member rates.

• Concentrated liquidity
  • More than 1.5 [update end of ’07 number] million interest rate futures trade every day at CME Group, resulting in consistently tight spreads
• Price transparency
  • Open, fair and anonymous trading environment
  • Market prices universally available in real time

• Market integrity
  • CME Clearing clears and settles all trades and guarantees the creditworthiness of every transaction

• Regulatory assurance
  • Our integrated compliance and market surveillance functions ensure the highest trading standards

• Free real-time data on leading electronically traded products

• View prices on Eurodollar futures and options, Packs and Bundles

©2008 CME Group, Inc.