Eurodollar

Traded on the Chicago Mercantile Exchange (CME), Eurodollars are time-sensitive deposits of US dollars held in foreign banks. However, the commodity bears no connection with the euro currency or the eurozone in general.

Indeed, the prefix 'euro' can indicate any currency where it is held in a country where that denomination is not the official money of the state. For example, euroyen is simply the Japanese yen held in a foreign bank.

A phenomenon which emerged following the end of World War II, Eurodollars were initially known as Eurobank dollars and the term was coined due to the large amount of US dollars being traded outside the US, both as part of the Marshal Plan to provide aid after the war and the emergence of the country as the leading global economy.

Other countries besides the US - including the Soviet Union - had deposits in US dollars in foreign banks, but because of Cold War fears that the US may act to freeze these assets, the Kremlin moved the sum of $800,000 into a British-owned bank in 1957, thereby created the first Eurodollar contract.

These contracts had a further benefit, whereby as trades were made in dollars and not the local capital, currency risk was reduced when dealing with US imports/exports, as US firms could be paid in their own currency.

Eurodollar futures trading is now used as a practice whereby traders can lock in interest rates at the time of the exchange for money they intend to borrow or lend in the future.

CME Eurodollar contracts are priced depending upon the market forecast for the next three months, with the market traditionally extremely liquid as investors look to secure favourable rates in order to improve investment security over the short-term.