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Nematrian Reference Library

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Summary "In Chapter XII, we were introduced to the Euromarkets. In that chapter, we briefly discussed the Eurocurrency market, which is a market for short-term deposits, or Eurodeposits. The most popular instrument in this market is the certificate of deposit (CD), which is a negotiable and often bearer instrument. We also mentioned that for long-term CDs (up to ten years), there is the possibility of selecting a CD with floating-rate coupons. For CDs with floating-rate coupons, the life of the CD is divided into subperiods of usually six months. The interest earned over such period is fixed at the beginning of the period, the reset date. This interest rate is based on the prevailing market interest rate at the time. In this chapter, we will describe the derivative instruments that have Eurocurrency instruments as the underlying asset. Then, we will focus on how to use those derivative instruments, especially Eurocurrency futures and options, to hedge interest rate risk."

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