Eurodollar Futures Option
Option on Eurodollar futures is a European type of call/put option on the Eurodollar futures price or put/call option on the 3-month LIBOR forward interest rate referred by the futures contract. Standard Black’s model can be used to price the options on LIBOR forward interest rate. The price of the option on Eurodollar futures is related to the price of options on LIBOR forward with a ratio adjustment.
Option on Eurodollar futures is a European type of call/put option on the Eurodollar futures price
For a European type of option on the LIBOR forward, the Black’s option pricing model has a closed form formula. The prices of call and put options on the LIBOR forward rate are
Similar to Eurodollar futures contract, option on Eurodollar futures follows the same mark-to-market convention. For the three-month Eurodollar futures contracts traded on the IMM, the reference notional of a contract is $1,000,000. For every basis point move in the futures quoted price, the change of the contract value is $25. Since the option prices in section A are in percentage points, the market value of each option contract is 2500 times the premium amount, i.e. or .
Since the option on Eurodollar futures model is relative straightforward, we construct 6 cases for testing purposes.
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