Fed Funds Futures Variance Futures

Damir Filipović, Anders Bjerre Trolle

Research output: Contribution to journalJournal articleResearchpeer-review

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.
Original languageEnglish
Book seriesQuantitative Finance
Volume16
Issue number9
Pages (from-to)1413-1422
Number of pages10
DOIs
Publication statusPublished - Sep 2016
Externally publishedYes

Keywords

  • Fed funds futures
  • Funding costs
  • Unsecured interbank money market

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