Euro Dollar Futures vs. FRA's position, interest, long, contract

meghanjackson

Here is my understanding of the 2 instruments.
Please let me know if I have the distinction correct. I realize that there are other distinctions as well.

In short,
With FRA you are locked in to borrow at certain rate in future. (gain for long position if interest rate goes up)
With Eurodollar futures, you are locked in to lend at a certain rate in future. (gain for long position if the interest rate goes down).

FRA - A forward contract - If you go long on an FRA, you have locked in the right to borrow at a certain rate in future.
So, if the interest rate rises in future, you have locked in your borrowing at a lower rate and hence you gain when interest rate rises. The gain will be settled in cash and you will get money if interest rate rises. The money will be paid of course in future.

Eurodollar futures - a futures contract - If you go long on a Eurodollar contract, you have locked in to receive a specific interest rate. (This is just opposite of FRA - With FRA you are locked into borrow at a specific rate in future).
So, with Eurodollar futures you gain money if the interest rates go down because you have locked in to get certain interest rate. (This is just opposite of FRA where you gain money if the interest rate goes up).

Best of luck to you all in your forthcoming exams.

ryanlb

Yes. Being long an FRA is similar to being short a Fixed Rate coupon Bond. If I remember correctly (and someone hop in and correct me if I am wrong), but being long a Eurodollar contract is similar to being long a zero coupon discount bond. So, slightly different structures. You describe the effects of interest rates on each correctly.

yospaghetti

Thanks for the confirmation ftwcfa. Good Luck.

Best of luck to you all in your forthcoming exams.