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Fed Funds Futures Variance Futures

Author

Listed:
  • Damir Filipovic

    (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute)

  • Anders B. Trolle

    (HEC Paris - Finance Department)

Abstract

We develop a novel contract design, the fed funds futures (FFF) variance futures, which reflects the expected realized basis point variance of an underlying FFF rate. The valuation of short-term FFF variance futures is completely model-independent in a general setting that includes the cases where the underlying FFF rate exhibits jumps and where the realized variance is computed by sampling the FFF rate discretely. The valuation of longer-term FFF variance futures is subject to an approximation error which we quantify and show is negligible. We also provide an illustrative example of the practical valuation and use of the FFF variance futures contract.

Suggested Citation

  • Damir Filipovic & Anders B. Trolle, 2014. "Fed Funds Futures Variance Futures," Swiss Finance Institute Research Paper Series 14-66, Swiss Finance Institute, revised Mar 2016.
    • Handle: RePEc:chf:rpseri:rp1466
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    File URL: http://ssrn.com/abstract=2531612
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    More about this item

    Keywords

    Fed Funds Futures; Funding Costs; Unsecured Interbank Money Market;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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