Fed Funds Futures Variance Futures

Damir Filipovic and Anders B. Trolle
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Damir Filipovic: Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute
Anders B. Trolle: HEC Paris - Finance Department

No 14-66, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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.

Keywords: Fed Funds Futures; Funding Costs; Unsecured Interbank Money Market (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2014-11, Revised 2016-03
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1466

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