Fed Funds Futures Variance Futures

Quantitative Finance, Forthcoming

Swiss Finance Institute Research Paper No. 14-66

24 Pages Posted: 28 Nov 2014 Last revised: 9 Mar 2016

See all articles by Damir Filipović

Damir Filipović

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Anders B. Trolle

HEC Paris - Finance Department

Date Written: December 9, 2015

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

JEL Classification: G12, G13

Suggested Citation

Filipovic, Damir and Trolle, Anders B., Fed Funds Futures Variance Futures (December 9, 2015). Quantitative Finance, Forthcoming; Swiss Finance Institute Research Paper No. 14-66. Available at SSRN: https://ssrn.com/abstract=2531612 or http://dx.doi.org/10.2139/ssrn.2531612

Damir Filipovic (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

HOME PAGE: http://people.epfl.ch/damir.filipovic

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Anders B. Trolle

HEC Paris - Finance Department ( email )

France
+33 (0)1 39 67 98 70 (Phone)

HOME PAGE: http://sites.google.com/view/anderstrolle

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