Eurodollar Futures Contract

[thunderbird]

How does a decrease in the interest rate lead to gain for the long position in Eurodollar futures contract?
So lets say, I’m long a eurodollar contract at the strike rate of 5%. If the interest rate falls to 2%, that means earlier I was willing to borrow at my strike rate of 5% and now I would be able to borrow at a reduced interest rate of 2% and hence I have gained? This is more like the concept of FRA?
Does that mean that the long party is actually trying to hedge against the risk of interest rates going up?

 

[S2000magician]

It’s the same as any other bond futures contract:

• Interest rates go down, bond value goes up
• Bond value goes up, long gains

 

[thunderbird]

Ok.. So this is when it is the case of futures/forwards. However, if you have a long position in a floating rate bond, then you would lose if the interest rates go down right. Cause you would then be receiving the lower coupon payments

 

[AmruthSundarkumar]

Yes as rates fall a long position in a floater loses.
Regarding the ED future think of it like this. At 5% the price was 95 ie, (100-(5%*100)). At 2%, the price becomes 98. It’s a gain to the long who entered at 95.
ED futures are linearly priced: 100 - (IMM rate)