Fed funds futures variance futures. Issue 9 (1st September 2016)

• Record Type: Journal Article
• Authors: Filipović, Damir; Trolle, Anders B.
• Is Part Of: Quantitative finance. Volume 16:Issue 9(2016)
• Page Start: 1413
• Page End: 1422
• Publication Date: 2016-09-01
• Subjects: Fed funds futures -- Funding costs -- Unsecured interbank money market; G12 -- G13; Finance -- Periodicals; Business mathematics -- Periodicals; Finance -- Mathematical models -- Periodicals; Investments -- Mathematics -- Periodicals; Economics -- Periodicals; Finances -- Modèles mathématiques -- Périodiques; 332.015118
• DOI: 10.1080/14697688.2016.1152391
• Languages: English
• ISSNs: 1469-7688

Abstract

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.