Last year's stability in short-term interest rates led to a drop in in Eurodollar futures trading at the Chicago Mercantile Exchange.

Volume in three-month contracts dropped 6.9%, to 99.6 million, the mercantile exchange said. Trading in Eurodollar options dropped 16%, to 21.8 million.

"Volume will explode once volatility returns to the world market," said Jack Sander, the mercantile exchange chairman. "Last year was the second- least volatile year in 30 years for short-term interest rates."

Total trading at the CME dropped 2.6%, to 177.0 million contracts. Volume peaked at 226.3 million contracts in 1994.

A spokesman at the exchange said volume was high in 1994 and 1995 chiefly because interest rate volatility led banks to buy large numbers of contracts to guard against interest rate fluctuations.

Some small and midsize banks buy Eurodollar contracts to lock in rates of interest, which protects the banks from changes in short-term fluctuations that can affect the profitability of CDs.

Large trading banks that design and sell derivatives also use exchange- traded Eurodollar contracts to help balance risk in their own internal books.

Because interest rates have been steady, users of derivatives may decide there is less reason to hedge. With less demand, trading banks may not be needing Eurodollar contracts to balance their books, said William P. Miller, independent risk oversight officer at the Common Fund and chairman of the End Users of Derivatives Association.

"There are a variety of factors that cause firms to employ risk management tools," he said. "If there is a perception of less risk, such as volatility of prices, then perhaps they may conclude that it is not necessary to fully hedge their risk."

Nevertheless, government data shows derivatives use is steadily rising. Mr. Miller attributed that to a strong economy and better understanding of how to use derivatives.

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