EuroDollar System Function and how it is out of control of the Federal Reserve

Notes

1. Any time you have something of value it can be used as the store of value for a fractional reserve banking / money system.
2.  

Research Links

• Wikipedia: EuroDollar – 

Mangold Explains

1.  Eurodollar are created by banks outside of the US financial system.
2. The FED has NO control over how many Eurodollars are created and cannot even accurately estimate how many are in circulation.
3. How to create a Eurodollar:  Just like here in the US, European banks use fractional reserve banking, etc so they can create outstanding loans based on their reserve requirements.  So if they are required to have a 10% reserve requirement, they can create 9,000 eurodollars based on a 1,000 deposit.
4. The above is how it started back in the 60s and 70s.  Now Jeff explains that they just make ledger entries and do not even require actual deposits.  This is how fucked up the system has become.
5. Since borrowers have to pay back in dollars/eurodollars this help support and create demand for USDs.
6. Remember back in 2008 when the FED silently bailed out European banks?  This is because Eurodollars borrowers were defaulting an the EU banks were about to go insolvent, so the FED bailed them out.

Eurodollar futures contract as synthetic loan

A single Eurodollar future is similar to a forward rate agreement to borrow or lend US1,000,000 for three months starting on the contract settlement date. Buying the contract is equivalent to lending money, and selling the contract short is equivalent to borrowing money.

Consider an investor who agreed to lend US1,000,000 on a particular date for three months at 5.00% per annum (months are calculated on a 30/360 basis). Interest received in 3 months' time would be US1,000,000 × 5.00% × 90 / 360 = US12,500.

• If the following day, the investor is able to lend money from the same start date at 5.01%, s/he would be able to earn US1,000,000 × 5.01% × 90 / 360 = US12,525 of interest. Since the investor only is earning US12,500 of interest, s/he has lost US25 as a result of interest rate moves.
• On the other hand, if the following day, the investor is able to lend money from the same start date only at 4.99%, s/he would be able to earn only US1,000,000 × 4.99% × 90 / 360 = US12,475 of interest. Since the investor is in fact earning US12,500 of interest, s/he has gained US25 as a result of interest rate moves.

This demonstrates the similarity. However, the contract is also different from a loan in several important respects:

• In an actual loan, the US25 per basis point is earned or lost at the end of the three-month loan, not up front. That means that the profit or loss per 0.01% change in interest rate as of the start date of the loan (i.e., its present value) is less than US25. Moreover, the present value change per 0.01% change in interest rate is higher in low interest rate environments and lower in high interest rate environments. This is to say that an actual loan has convexity. A Eurodollar future pays US25 per 0.01% change in interest rate no matter what the interest rate environment, which means it does not have convexity. This is one reason that Eurodollar futures are not a perfect proxy for expected interest rates. This difference can be adjusted for by reference to the implied volatility of options on Eurodollar futures.
• In an actual loan, the lender takes credit risk to a borrower. In Eurodollar futures, the principal of the loan is never disbursed, so the credit risk is only on the margin account balance. Moreover, even that risk is the risk of the clearinghouse, which is considerably lower than even unsecured single-A credit risk.