The CBOT has introduced binary options on Fed Funds target rates to complement their existing complex of futures and options focused on FOMC rate decisions. Like other money market futures the original contracts languished without a critical mass for several years, but emergency stimulus after 2001 led to a rate of just 1%, dramatically highlighting the need to hedge Fed rate decisions. The latest tightening cycle has also been plagued by deviations between the effective and target Fed Funds rates, which is the one aspect of the original contracts that introduces uncertainty into their pricing. The new binary options have the target Fed Funds rate as their underlying risk and eliminate the biggest source of uncertainty in the original futures and options contracts.

For the full report view the PDF below.

 - Boberski of Bear Stearns analyzes CBOT Binary Options - 08.09.2006