| TED SPREAD LINGO
BASIS POINT or TICK Measure of
movement in the Eurodollar and T-Bill contracts. One percentage
point move in yield equals 100 basis points or ticks, so a tick is
1/100 of a one percentage point move in interest rates.
EURODOLLAR Dollars deposited
outside the U.S. In the late ‘60s American banks found they couldn’t
raise deposits through the domestic CD markets because of government
interest rate ceilings. To avoid these restrictions, they offered
higher yielding deposits in unrestricted overseas branches.
Eurodollars are those unregulated, uninsured, unrestricted deposits
in the international market.
EURODOLLAR CD Certificates of
Deposits in overseas banks payable in dollars. $1,000,000 worth is
the basis of the Eurodollar Contract, ticker symbol ED. The futures
contract for Eurodollar CDs forms half of the TED Spread, the
contract for T-bills the other half.
LIBOR London Interbank Offer
Rate, the interest rate benchmark for the Eurodollar
contract.
SPREAD Buying and selling two
related futures contracts at the same time, either the
near-term and long-term contracts of a single commodity, or
the same expiration months of different commodities. The
latter spreads trade on fluctuating long-term relations between
commodities, like the TED Spread or the Gold - Silver ratio.
T-BILL U.S. government debt
instrument that matures within one year. A $1,000,000 lot of T-bills
is the basis of the T-Bill futures contract, which forms half
of the TED Spread. (The contract for Eurodollar CDs forms the
other half.) Ticker symbol is TB.
T-BOND U.S. Government debt
instrument with maturities greater than 20 years.
T-NOTE -- U.S. government debt
instrument that matures within ten years.
TED SPREAD The simultaneous
purchase of a $1,000,000 futures contract for U.S. T-bills and sale
of a $1,000,000 futures contract for Eurodollar CDs, or vice versa.
When you buy the T-bills and sell the Eurodollars, you
are long the spread, expecting crisis or rising interest
rates. When you sell the T-bills and buy the
Eurodollars, you are short the spread, expecting calm or
falling interest rates.
-- Franklin
Sanders
-- May,
1997
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