Federal Fund futures contracts indicate the average daily federal funds effective rate in a particular month. Investors consider Federal Funds to be a satisfactory means for tracking market expectations on federal monetary actions. Further, Fed Funds are useful tools for traders that want to manage risk and speculate on or hedge against short-term interest rate changes due to changes in monetary policy.
30-Day Federal Funds Contract Specifications
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30-Day Federal Funds Facts
The rates are determined by banks who charge one another for loans held at the Fed. These rates can change every day can be indicative of rate trends. Trading Federal Fund futures can also allow participants to trade curves, strips, or spreads against LIBOR or Eurodollar futures.
The price of Fed Fund futures contracts are determined by daily market opinion of the fed fund rates which are calculated and made public by the Federal Reserve Bank of New York. Since these rates are determined by daily rates that are effective for a whole month, it is closely connected to short term interest rates. These futures can also be helpful in addressing the risk attached to short cash instrument credit costs.
Source: CME
Last updated May 2013.