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Fed Funds Futures

Trading Term

Fed Funds futures are interest rate derivatives that allow investors to speculate on or hedge against future changes in the U.S. federal funds rate, which is the benchmark interest rate set by the Federal Reserve for overnight loans between banks. These futures trade on the Chicago Mercantile Exchange (CME) and are one of the most closely watched tools for gauging market expectations of future monetary policy decisions.

Each Fed Funds futures contract represents an average daily federal funds effective rate for a specific calendar month, expressed as an annualized interest rate. The contract is priced using the formula:

Price = 100 − Expected Fed Funds Rate

For example, if the market expects a Fed Funds rate of 5.00% for March, the futures contract would trade around 95.00. If the contract later moves to 95.25, it reflects expectations of a rate cut to 4.75%.

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