Contrary to what many people believe, the Eurodollar futures have nothing to do with the Euro Currency. Eurodollar futures are an interest rate product that represents the interest earned on U.S Dollars held overseas, regardless of where that might be. Dollars held from Laos to London are all considered Eurodollar deposits. The U.S. Dollars on deposit earn interest equivalent to the London Interbank Overnight Rate (LIBOR). Eurodollar futures are quoted at 100, (which is an interest rate equal to zero) - their discounted present value. The difference of this equation is the current rate of interest. For example, if the 3 month LIBOR rate is at 2%, Eurodollar futures with three months till expiration would be priced at 98.00. Therefore, theoretically, the price of Eurodollar futures can never be greater than 100.
A benchmark for investors globally, Eurodollar futures provide a valuable, cost-effective tool for hedging fluctuations in short-term U.S. dollar interest rates. Eurodollars are U.S. dollars deposited in commercial banks outside the United States. Eurodollar futures prices reflect market expectations for interest rates on three-month Eurodollar deposits for specific dates in the future. The final settlement price of Eurodollar futures is determined by the three-month London Interbank Offered Rate (LIBOR) on the last trading day. Eurodollar futures were the first futures contract to be settled in cash, rather than physically delivered. A total of 40 quarterly futures contracts, spanning ten years, plus the four nearest serial (non-quarterly) months are listed at all times. Today more than 90 percent of Eurodollar futures, trade electronically on the CME Globex electronic trading platform.
Eurodollar Packs and Bundles.
Packs and Bundles provide convenient alternatives for executing strips of Eurodollar futures.
Eurodollar Packs are the simultaneous purchase or sale of an equally weighted, consecutive series of four Eurodollar futures contracts, quoted on an average net change basis from the previous day’s close. Packs, like Eurodollar futures, are designated by a color code that corresponds to their position on the yield curve. There are always 37 Packs listed for trading at a given time. The most common are: Red, Green, Blue, Gold, Purple, Orange, Pink, Silver and Copper, corresponding to Eurodollar futures years 2-10, respectively.
Eurodollar Bundles allow you to simultaneously buy or sell consecutive series of Eurodollar futures in equal proportions, typically beginning with the front quarterly contract. This means that a 5-year “strip” comprised of 20 individual contracts can be executed with just one transaction.
The price of a Eurodollar Pack or Bundle is quoted in terms of the average net change from the previous day’s settlement prices for the entire group of contracts in the pack or bundle. Bundles and Packs are quoted in minimum .25 tick increments.
