What are Fed Funds?
Federal funds are bank reserves at the United States Federal Reserve. Banks keep reserves at Federal Reserve Banks to meet their reserve requirements and to clear financial transactions.
The Federal Reserve Bank of New York gathers transactional data on Fed Funds daily from banks and broker dealers that participate. Using a volume weighted average, the FRBNY calculates the effective Fed Funds rate (EFFR) and publishes this number on it’s website.
Fed Funds Futures are future contracts based on the EFFR as reported by the FRBNY. The contract unit size is $5m per contract and contracts are listed monthly, extended out over 36 months or 3 years of yield curve.
Fed Fund Futures are traded as a price rather than a rate. The price is the implied rate subtracted from 100.
Implied Rate – 100 = Fed Funds Price.
At final settlement, Fed Fund Futures are cash settled and there is no physical delivery involved.