mengxu

ok i think ive understood this topic. Eurodollar futures are quoted as a discount yield. If the LIBOR Drops, the value of the Eurodollar goes up (this is kind of like a bond and interest rates). SO if you are hedging something from dropping interest rates, you would go long a eurodollar future because it would increase in value if the predicted decrease in rates occurs.

Caps and floors are are also used for hedging. If you have a floating rate asset, you are worried about decreasing rates. Therefore, you buy a floor and if rates drop you get a payment from the short. You could also buy an interest rate put, or a call on a bond (again if rates drop in this case, the bond value would increase and you get payment). If you have a floating rate liability, you are worried about rising rates. Therefore, you can buy a cap or interest rate call. If rates rise, you would get payment from the short. You could also buy a put on a bond. If rates rise, the bond value decreases and you win.