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The Chicago Board of Trade (CBOT®) today announced the successful launch of its Binary options on the Target Federal Funds Rate. The new contract, developed at the request of CBOT market participants who desired target rate exposure, further diversifies the CBOT’s product offering at the short end of the yield curve.
The Target Federal Funds Rate is set by the United States Federal Reserve Bank, typically at its scheduled Federal Open Market Committee (FOMC) meetings.
CBOT Senior Vice President of Business Development Robert D. Ray said, “The CBOT’s new Binary options on the Target Federal Funds Rate were designed to provide new trading opportunities for participants such as dealer short-term funding desks, index arbitragers and hedge funds that seek to manage short-term interest rate exposure.”
Building on the growth of electronically-traded Financial options at the CBOT, Binary options on the Target Federal Funds Rate contracts will trade exclusively on the Exchange’s premier electronic trading platform. In June 2006, a record 2,066,032 Financial options were traded electronically at the CBOT – more than 93,000 contracts per day and more than three times greater than June 2005. Last month, nearly 20 percent of Financial options trades at the CBOT were executed electronically.
At expiration, binary options have three possible outcomes, and final contract settlement is either a fixed dollar amount or nothing at all. When the options expire, “in the money” options pay $1,000 to option holders, while those that are “at the money” or “out of the money” pay zero. Strike prices for the new CBOT Binary options correspond to the Target Federal Funds rate using a formula of 100-minus the actual Target rate. For example, a Target Federal Funds Rate of 5.25 percent would be reflected as 94.75. Expiring options are cash-settled and based upon the most recent Target Federal Funds Rate level established by the FOMC. The options will expire on the last day of a regularly-scheduled FOMC meeting.
Binary options on the Target Federal Funds Rate trade from 6:00 p.m. to 4:00 p.m. CT Sunday through Friday. Trading in expiring options ends at 2:00 CT on the final trading day. The Exchange has contracted with two firms to provide two sided markets for the new contract during daytime hours.
For more information, visit Binary Options.
