Abstract
A Eurodollar Time Deposit (TD) is a fixed-rate US dollar time deposit in a bank not subject to the U.S. banking regulations. The center of this market is London and currently, there is over $3 trillion in deposit. There is a spread between London Inter-bank Offer Rate (LIBOR) rates and T-bill rates. The exact cause of this spread is not well understood, and at this stage, we follow market convention and simply assume that LIBOR is the riskless rate for the Eurodollar market. The most widely traded short-term interest-rate futures contracts are on Eurodollar time deposit rates. Both LIFFE and the Chicago Mercantile Exchange have Eurodollar contracts. Eurodollar futures contracts are very similar to T-bill futures contracts. The LIBOR rate is taken as an average of selected dealer quotes. The analysis of Eurodollar futures contracts is complicated by the fact that the contract is not on a traded security, but on an interest payment.
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