Markets Home

Active trader

Hear from active traders about their experience adding CME Group futures and options on futures to their portfolio.

Find a broker

Search our directory for a broker that fits your needs.

CREATE A CMEGROUP.COM ACCOUNT:

MORE FEATURES, MORE INSIGHTS

Get quick access to tools and premium content, or customize a portfolio and set alerts to follow the market.
Market Data Home

Real-time market data

Stream live futures and options market data directly from CME Group.

E-quotes application

Access real-time data, charts, analytics and news from anywhere at anytime.

CME DATAMINE:

THE SOURCE FOR HISTORICAL DATA

Explore historical market data straight from the source to help refine your trading strategies.
Services Home

Uncleared margin rules

Understand how CME Group can help you navigate new initial margin regulatory and reporting requirements.

Calculate margin 

Evaluate your cleared margin requirements using our interactive margin calculator.
Education Home

FX Insights from Macro Hive

Receive exclusive insights on key FX macro themes, volatility trends, and market events through our bi-weekly report.

Create a CMEGroup.com Account: More features, more insights

Get quick access to premium educational content, including expert-led webinars, a real-time trading simulator, and more.
      Course Overview
      • Introduction to STIR Futures
      • Fundamentals and Interest Rate Futures
      • Understanding IMM Price and Date
      • The Link Between Eurodollar Futures Pricing And The Forward Rate Market
      • What is the Eurodollar Settlement Process (cash settled)
      • The Importance of Basis Point Value (BPV)
      • Understanding Convexity Bias
      • What is ICE LIBOR/What is Eurodollar
      • Understanding the FOMC Report
      • Introduction to Fed Fund Futures
      • Introduction to the CME FedWatch Tool
      • What is SOFR
      • Trading SOFR Futures
      • What is SONIA?
      • Trading SONIA Futures
      Understanding STIR Futures
      You completed this course.Get Completion Certificate

      What are Fed Funds?

      Video not supported!

      Federal Funds, Fed Funds for short, are generally a transaction of an unsecured loan of U.S. dollars to a borrower or purchaser that is a depository institution (DI) from a lender or seller that is a DI, foreign bank, government-sponsored enterprise or other eligible entity. These transactions are usually conducted on an overnight or next day (T + 1) basis.

      The Federal Reserve Bank of New York (FRBNY) gathers transactional data on Fed Funds daily from participating banks and broker dealers. Using a volume-weighted average, the FRBNY calculates the Effective Fed Funds Rate (EFFR) and publishes this number on its website.

      Fed Funds and Overnight Interest Swap (OIS) rates are highly correlated and therefore, many IRS discounting models will use either Fed funds, OIS or both when building a forward discounting curve. In addition, Fed Fund futures are also used for trading and other funding curve risk management strategies.

      Fed Fund Futures - Contract Specifications

      Fed Fund futures contracts are based on the EFFR rate as reported by the FRBNY. Contracts are listed monthly, extending 36 months or three years out on yield curve.

      Fed Fund futures are traded in IMM index terms, that is, as a price rather than a rate. The price is simply the implied rate subtracted from 100. For example, if the average monthly Fed Funds rate for September is 1.20% the futures price would be 100 - 1.20 = 98.800.

      At final settlement, Fed Fund futures are cash-settled, there is no physical delivery involved. The final settlement calculation at expiry is the total of all the daily rates published by the FRBNY divided by the total number of days in that month.

      Fed Funds Example

      For this example, we will use the September 2017 Fed Funds contract. There are 30 days in the month of September. When we calculate the total of all the reported EFFR rates from FRBNY = 34.600.

      You would then divide that by the number of days in the month 34.600 ÷ 30 = 1.153.

      Take this number and subtract from 100 you get 100 – 1.153 = 98.847. Therefore, 98.847 was final settlement for the September 2017 Fed Funds futures contract.

      Backward Looking Futures Contract

      To determine the final value of a Fed Funds futures contract, one must wait until the end of the contract month to determine its price. In other words, this contract is backward looking. Since the Federal Open Market Committee (FOMC) sets the Fed Fund target rate, the months when there is an FOMC meeting can be very important to contract pricing. But since most FOMC meetings occur mid-month, the first Fed Fund futures contract to be fully affected by a rate change would be the next deferred contract month, rather than the contract in which the meeting takes place.

      Summary

      Understanding the pricing mechanics of a futures contract is essential to understanding its trading behavior. While the contract construction of Fed Funds futures is simple the market forces that go into its pricing like, FOMC meetings, inflation expectations and employment statistics are sometimes complex and uncertain.


      Test Your Knowledge

      Related Courses
      /content/cmegroup/en/education/courses/understanding-stir-futures/introduction-to-fed-fund-futures
      • {{ course.name }}
      Previous Lesson
      Next Lesson
      Course Overview
      Get Completion Certificate
      Previous Lesson Next Lesson
      • YouTube
      • Twitter
      • Facebook
      • LinkedIn
      • Instagram
      • Rss

      CME Group is the world's leading and most diverse derivatives marketplace. The company is comprised of four Designated Contract Markets (DCMs). 
      Further information on each exchange's rules and product listings can be found by clicking on the links to CME, CBOT, NYMEX and COMEX.

      © 2021 CME Group Inc. All rights reserved.

      Disclaimer  |  Privacy Policy  |  Cookie Policy  |  Terms of Use  |  Data Terms of Use  |  Modern Slavery Act Transparency Statement  |  Report a Security Concern