Strips: Arbitraging the Eurodollar Cash and Futures Markets
- Topics:
- Commercial Lending
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Overview: The article emphasizes that one of the most significant uses of contracts has been by arbitrageurs in the money markets that often combine cash and futures positions to create a synthetic instrument called a “strip.” Many of the trades in the quarterly Eurodollar futures contracts are devoted to these strategies. A strip can mean combining cash deposits (borrowings) with a long (short) position in the futures contracts. Such a trade is initiated when it is determined that the trader can lock in a higher return or a lower borrowing cost than are otherwise available in a cash-only money market transaction. The term “strip” is derived from the practice of using two or more consecutive quarterly futures expirations in combination with a Eurodollar cash position. The traders must determine for themselves whether the spread between the strip interest rate and the cash-only transaction is wide enough to make such a trade worthwhile.
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Format: PDF | Size: 97KB | Date: Jun 2001 | Pages: 4
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