With the launch of Binary Options on the Target Fed Funds Rate, the Chicago Board of Trade now offers two avenues of approach to the short-term money market. With CBOT 30-Day Fed Fund Futures (FF) and companion options (FFO), users can manage risks associated with prolonged, i.e., one-month exposure to the true cost of overnight money, in the form of the effective overnight federal funds rate. With Fed Binaries, users can acquire or lay off risks arising directly from monetary policy actions by the Federal Open Market Committee (FOMC) via changes in its target level for the overnight fed funds rate. This publication examines the linkages that connect the price dynamics of Fed Binaries and FF/FFO, and shows how reshaping the implied distribution of monetary policy actions allows you to obtain mutually coherent sets of price changes that lead to sensible Binary-FF spread ratios.

For the full report view the PDF below.

 - Binary - FF Spread - 09.21.2006