Fed fund futures are a cash settled instrument based on the average daily effective Fed funds rate (published by the New York Fed) over the course of the contract delivery month. The futures are based nominally on a $5 million notional principal unit. Fed fund futures represent a direct reflection of the market’s insight into the future course of the Fed’s monetary policy.
Due to recent macroeconomic events, there is heightened anticipation that the Fed may act soon to lift up off of the 0-25 basis points mark (historic lows) that have been held since December 2008. The fed funds futures are are used as a predictive tool used to hedge and gain exposure to short term interest rates in anticipation of a potential change in the Fed’s monetary policy.
Fed Funds Futures (/ZQ) Specs:
Contract Size (leverage) - $5 Million Notional
Current Price - $99.75 *
Notional Value -= Cash settled
Tick Size - $0.005 ($20.835/tick)
Fed funds futures have a different way of being quoted. They are quoted by the ‘IMM index’, aka 100 less the interest rate. This means you take the interest rate (the price of the future and subtract it from 100. The contract trades in all 12 months and extends 3 years into the future.
The CME group has created a great tool that provides a very direct interpretation of the meaning of the fed funds futures prices. This tool hones in on contract months and associated prices that coordinate with scheduled FOMC meetings. It calculates the probability of where the spot target for the fed funds rate may be at month’s end in which an FOMC meeting is scheduled.
Strategies: N/A
Products Discussed In This Episode: /ZQ
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