Fed Funds Futures

Fed Funds Futures are futures contracts of the Fed funds rate, which is the interest rate the Fed charges other banks, which (in effect) affects what those banks charge to consumers. When a Fed funds futures contract expires, the Fed funds rate at the time determines the futures contract payout. And a Fed Fund future, more or less, is just a call option on the streams of interest payments from U.S.-backed government "paper," or bonds.

Fed funds futures are on the Chicago Mercantile Exchange (CME). Oftentimes, Fed funds futures are used by those seeking to hedge their bets against market fluctuations in short-term interest rates. That means banks for one, and financial managers and savvy short-term investors as well.