The new CME® 2-year, 5-year and 10-year Swap futures are designed to hedge long maturity cash market interest rate swaps. At the same time, they are an innovative product that can be spread against CME's highly liquid Eurodollar futures and options contracts. The trade and volume of Eurodollar products has grown in tandem with the over-the-counter interest rate swap market during the past two decades. Since their launch in December 1981, Eurodollar futures have become one of the most versatile hedging and trading tools available to financial professionals.

Before the advent of CME Swap futures, most dealers hedged their positions by using strips of Eurodollar futures, or Eurodollar Packs and Bundles. There is a strong correlation between the interest rate swap market yield curve and CME Eurodollar strip. Thus, the presence of the CME Eurodollar strip with its 10-years of quarterly contracts provides a unique companion product to CME Swap futures contract.

There are numerous spreading opportunities between the Swap futures and Eurodollar Packs and Bundles, as well as the performance bond cost savings of cross-margining via the CME Clearing House SPAN® system.

This chart best illustrates the strong correlation between the movement of a cash 5-year interest rate swap and the CME Eurodollar bundles.

CME 2-year, 5-year and 10-year Swap futures can be used to:

• Profit from a short-term view on long-term interest rate Swaps.
• Construct hedges of individual U.S. dollar interest rate swaps or corporate debt with minimal basis risk.
• Lengthen or shorten the duration of an interest rate swap or corporate bond portfolio by selling or purchasing CME 2-year, 5-year and 10-year Swap futures.
• Create intra-product yield curve spreads via trades between the Eurodollar Packs and Bundles and 2-year, 5-year and 10-year Swap futures.
• Take advantage of yield curve and other arbitrage opportunities by executing "Exchange Basis Facility" (EBF) trades with 2-year, 5-year and 10-year Swap futures against various cash instruments.

Spreading Swap futures against Eurodollar futures
Since each full "tick" or the Basis Point Value (BPV) in CME Swap futures is worth a constant $100, it is easy to construct yield curve spreads between the Swap futures and various combinations of the 10-years of quarterly expirations in CME's flagship Eurodollar futures — especially by using Eurodollar Packs & Bundles.

For example, a trader anticipates that the interest rate swap curve between 2-years and 10-years may steepen. The trader takes advantage of his/her view by purchasing a 2-year Eurodollar Bundle and selling the 10-year Swap futures. Since the BPV of the eight quarterly Eurodollar contracts equals $200 (8 contracts x $25 per contract) and the BPV of the 10-year Swap futures equals $100, the trader would buy one 2-year Bundle ($200 BPV) and sell two of the 10-year Swap Futures ($200 BPV) to construct a yield curve steepening trade.

However, with the availability of a 2-year, 5-year and 10-year Swap future contracts, a yield curve play is even easier to execute on a "one-to-one" basis.