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The contracts are designed to complement the CBOT’s current Federal Funds product complex. Binary options will provide exposure to the actual Target Federal Funds rate, set by the Federal Reserve at its Federal Open Market Committee (FOMC) meetings, versus the effective Fed Funds rate, which is set by the market and covered by the CBOT’s existing Federal Funds futures and options product suite.
Robert D. Ray, Senior Vice President of Business Development at the CBOT said, “The new CBOT binary options contracts serve as a natural extension of our existing Fed Funds product suite. The contracts were designed to provide new trading opportunities for institutional customers, including short-term funding dealer desks, hedge funds and other parties seeking to manage or acquire short-term interest rate exposure. Market participants have expressed a desire for target rate exposure.”
Binary options contracts are based on events that have two possible outcomes, and the payoff is either a fixed dollar amount or nothing at all. With the new CBOT Binary options, the set of strike prices correspond to the Target Federal Funds Rate using a formula of 100-minus the target rate. For example, the current target rate of 5.25 percent would be reflected as 94.75. At option expiry, Binary Options on the Target Federal Funds rate contracts that are “in-the-money” pay $1,000 while those that are “at-the-money” or “out-of-the-money” pay zero. Expiring options will be cash-settled and based on the outcome of the last day of a regularly-scheduled FOMC meeting.
The new binary options contracts will trade from 6:00 p.m. to 4:00 p.m. CT, Sunday through Friday. Trading in expiring options will end at 2:00 p.m. CT on the final trading day. The Exchange is planning to institute an electronic market maker program to provide liquidity for market participants at launch.
About the CBOT
As one of the leading global derivative exchanges, the Chicago Board of Trade provides a diverse mix of financial, equity and commodity futures and options-on-futures products. Building on its 158-year history, the CBOT continues to advance into the future using the strength of deep liquidity, market integrity and member-trader expertise. Using superior trading technology in both electronic and open-auction trading platforms, the CBOT provides premier customer service to risk managers and investors worldwide. For more information, visit our website at www.cbot.com.
