What Are Futures Packs?
The futures pack is a contract to buy a set number of Eurodollars at a pre-established price in four consecutive delivery months.
It is a variation on a Eurodollars futures contract, which is an agreement to buy or sell U.S. dollar-denominated deposits at foreign banks or at the overseas branches of American banks at a set exchange rate at a future date.
- A futures pack is a series of buy or sell orders for Eurodollars to take place over four consecutive months.
- Eurodollar investors buy a pack to save fees on separate orders.
- Eurodollars are U.S. dollar-denominated deposits held in foreign banks and thus subject to fluctuations in the currency of the nation in which they are deposited.
Understanding the Futures Pack
Futures packs and bundles comprise about 20% of Eurodollar futures contract transactions. Eurodollars are U.S. dollar-denominated deposits held in banks overseas. They are not subject to U.S. regulations, so the value of Eurodollars tends to fluctuate more against the value of the currency of the nation in which they are held.
An investor might buy a futures pack in June with delivery dates in September, October, November, and December. That makes them shorter-term bundles. Futures packs give the investor the advantage of being able to transact several trades at a single price. Since the order is for multiple deliveries, it may cost less than entering each order separately.
The quoted prices of futures packs and bundles are based on the average net change from the previous day’s settlement prices for the entire group of contracts, in increments of one-quarter of a basis point (0.25 bps).
Siblings to the Futures Pack
Futures bundles are another way to execute a series of trades. In this case, the investor agrees to simultaneously purchase or sell a set number of futures contracts in each consecutive quarterly delivery month over a period of one or more years.
Using a single purchase of multiple futures contracts is known as buying futures strips, also known as calendar strips. Traders use futures strips to lock in a price for their target timeframe. A futures strip might be purchased to lock in a price for natural gas futures for one year, with 12 monthly contracts connected in a strip.
Futures strips are common in the energy market. Traders use them to hedge and speculate on the price movements in oil, natural gas, and other commodities. Futures strips, packs, and bundles also are used in trading on interest rates, agricultural goods, and energy futures.
A Short Primer on the Futures Market
Futures are a type of financial contract which obligates the buyer to purchase or sell an asset at a predetermined price at a specific future date. The asset represented in the contract can be a physical commodity or a financial instrument. Futures are essentially a way to speculate on the price movement of the underlying asset. Though associated with an agrarian past, futures markets now involve the buying, selling, and hedging of financial products and the direction of interest rates.
Producers and suppliers use futures contracts as a way to smooth out volatility in the prices they can get for their goods. Traders use them to make money on the fluctuations in price. Demand in the futures markets generally grows when the outlook in the stock market is uncertain. Fulfillment of a futures contract can involve physical delivery of an asset or cash settlement.
The best known future markets are the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX), and the Chicago Board of Options Exchange (CBOT). The Commodity Futures Trading Commission registers and regulates future markets in the United States.