Fed funds futures are financial contracts that reflect market expectations for the daily official federal funds rate at the contract’s expiration date. The Chicago Mercantile Exchange (CME) trades the futures contracts, which are cash paid on the final business day of each month. Fed fund futures can be traded every month or up to 36 months ahead of time.
What is the purpose of Fed Fund futures?
Fed funds futures are financial contracts that reflect market expectations for the daily official federal funds rate at the contract’s expiration date. The Chicago Mercantile Exchange (CME) trades the futures contracts, which are cash paid on the final business day of each month.
What is the definition of 30 day federal funds futures?
One of the most extensively used methods for hedging short-term interest rate risk is 30-Day Fed Funds futures and options. Fed Fund futures are a direct representation of market consensus on the Federal Reserve’s monetary policy direction in the future.
So, what exactly are SOFR futures?
The Secured Overnight Financing Rate (SOFR) is a wide indicator of the cost of borrowing cash overnight with Treasury securities as collateral. ICE Futures Europe trades both one-month and three-month futures contracts, which clear through ICE Clear Europe. The successful launch of ICE SONIA futures, which have traded in excess of 1.4 trillion in notional volume, has paved the way for ICE SOFR.
In the federal funds market, what is traded?
The federal funds market is an over-the-counter interbank market for unsecured overnight loans of dollar reserves held at Federal Reserve Banks. The fed funds rate is a weighted average of market interest rates on these loans.
Is OIS equivalent to Fed Funds?
3-month LIBOR is a floating rate of interest that varies depending on how risky a lending bank considers a borrowing bank. The OIS is a swap based on the overnight rate, which is usually set by the central bank in the area. The OIS enables LIBOR-based banks to borrow at a fixed rate for the same amount of time. The spread is calculated using the LIBOR Eurodollar rate and the Federal Reserve’s Fed Funds rate in the United States.
LIBOR is hazardous because the lending bank lends cash to the borrowing bank, whereas the OIS is stable because both counterparties merely swap the floating rate for the fixed rate of interest. As a result, the difference between the two is a measure of how likely borrowing banks are to default. In contrast to liquidity risk premiums, this indicates counterparty credit risk premiums. However, because of the funding’s tenor mismatch, it also reflects concerns about liquidity risk.
What is a futures contract for interest rates?
An interest rate future is a futures contract with an interest-paying underlying product. A contract is an agreement between a buyer and a seller for the delivery of an interest-bearing asset in the future.
Is there a SOFR rate for one month?
Approximately One-Month SOFR One-Month SOFR futures (SR1) are cash settled and are based on the arithmetic average of daily SOFR values over the contract delivery month.
What exactly are SONIA and SOFR?
SONIA vs. SONIA vs. SONIA vs. SO SONIA is an unsecured rate based on interbank money market trading, whereas SOFR is a secured rate based on repo transactions. SONIA and SOFR are fundamentally distinct from interbank offered rates like LIBOR, which are accessible in a variety of tenors (one-month, three-month, six-month, etc.).
Will Eurodollar futures be available in the future?
However, because Eurodollar futures beyond June 2023 are effectively linked to the corresponding SOFR futures for the reasons stated above, the picture of effective benchmark exposure looks very different. Over 46% of total current ED futures OI is connected to post-June 23 LIBOR, which is now fully SOFR based risk, or ED+SOFR expirations that will convert to SOFR holdings if held until a LIBOR stoppage event. The SOFR-linked OI of 20.2 million contracts is up 70% since March, when the CME Rulebook added SOFR-based fallbacks.
The options market, where CME has announced a similar conversion mechanism that will convert options on Eurodollar futures into options on matching SOFR futures at the same time as the scheduled Eurodollar futures conversion, is even farther ahead of the benchmark transition.
When the volume of SOFR options, Eurodollar options that expire after June 2023, and earlier Eurodollar options that expire into later underlying futures contracts is added together, we find that a whopping 61 percent of relevant options are already trading with underlying risk tied directly to or linked to SOFR.
The futures and options markets have mostly embraced SOFR, and market spreads reflect the fixed link between CME Eurodollar futures and options and SOFR futures and options for expirations after June 2023.