Question on future price.

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heavenkid

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A trader buys(takes a long position in) in T-bill futures contract ($1 million face value) at 98.14 and closes it out at price of 98.27. On this contract the trader has

A. lost $325
B. gained $325
C. lost $1,300
D. gained $1,300

answer is B.

My text book explained like below.
The price is quoted as (one minus the annualized discount) in percent. Remember that the gains and losses on T-bill and Eurodollar futures are $25 per basis point of the price quote. The price is up 13 ticks and 13X$25 is a gain of $325 for a long position.

but what is $25. Is there something I missed? This question makes me confuse. I am a really beginner on CFA test.

thanks
 
Eurodollar futures contract size has a principal value of $1,000,000 with a three-month maturity.

Eurodollar futures move in 1 point increments, or .01, equaling $25.

The Eurodollar tick reflect the dollar value of a 1/100 of one percent change in a $1 million, 90-day deposit,

REMEMBER THE EURODOLLAR IS A 90 DAY DEPOSIT. SO YOU DIVIDE BY 4 i.e 90/360

$1,000,000 notional value x .0001 x 90/360 = $25.
 
Well, this isn't exactly right but you can remember it this way -

The T-bill futures contract is a contract on the price of a 90-day $1M T-bill at contract expiration. But the price is quoted in this weird way that corresponds to an annual rate. Thus, if the price of a 90-day T-bill at contract expiration is 98, the futures contract will be at 100 - 360/90*(100 - 98) = 92. Or even more simply, 100-futures price = annual interest rate on T-bill at expiration, but you are only getting 1/4 of it. So a change of 1 in the T-bill futures price gives you $1M*0.01*1/4 =$2500. So a 1-tick change gives you a change of $25.

Thus, If you have a long position at 98.14 this corresponds to a 90-day T-bill price of 100-(100-98.14)/4 = 99.535. A long position at 98.27 corresponds to a T-Bill price of 99.5675.
So the gain on the futures contract is (99.5675 - 99.535)/100 * $1M = $325

BTW - While T-bill futures contracts seem to still exist, I think the open interest on them is 0 last I checked. Everyone trades Eurodollar , LIBOR, etc. instead of T-Bills.
 
No_tension's post is pretty funny in the context of my BTW. It seems that the world has decided that not only should all the liquidity go to the Eurodollar contract, but they are in fact the same contract.

This is not true, of course, and there are some very important differences. The two biggest differences (besides liquidity) are:
1) T-bill contract is deliverable and Eurodollar is not.
2) T-bill contract is on the short-borrowing rate on $ of the US govt. Eurodollar contract is on short-term borrowing rate on $ from a bank outside the US. Those are obviously different rates and there is basis between them. Eurodollar must be greater than T-bill (ED has default risk and a ED deposit is not nearly as liquid as a T-bill). The difference between the two in lots of ways is about global financial disaster risk.

The ED futures contract is a contract on an interest rate. The T-bill contract is on the price of a bond. The difference between those two will confound you when you study convexity bias for L II.
 
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