Fed Funds Futures in a Post-ZIRP World

As the FOMC returns to more active management of its key target rate, Federal Funds futures have experienced dramatic growth.

Contract Background

The   Federal Funds (FF) futures   contract provides a hedging tool for market participants seeking to hedge movements due to Federal Open Market Committee key rate decisions, settling each month to a simple average of the daily Effective Federal Funds Rate subtracted from 100.  The EFFR value in turn is calculated by the Federal Reserve of New York as a volume-weighted median of overnight federal funds transactions1, making the futures contract price a measure of average overnight borrowing throughout a given month.

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