Anticipating Fed Action with Binary Fed Funds Options

The CBOT writes, "binary options have two 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 the CBOT's Binary Options and also read Anticipating Fed Action.

Is it ephemeral-financial-media-buzz or is it real?

Google Trends analyzes web searches to compute how many searches have been done on a particular topic and how frequently the topic has appeared in Google News stories. So, for example, if you're wondering if the topic of "stagflation" is appearing more frequently in the news and other media flabbergasts, you can check Google Trends to verify your inclination.

See also: Nouriel Roubini discusses the potential uses and caveats of 'Google Trends' as an economic barometer.

Tour de Investing

In What I learned watching the Tour, the FinanceProfessor parallels the steps necessary to win the Tour de France and successful investing.

Are future fed rate cuts implied in the yield curve?

Econobrowser makes a case (not necessarily one that we agree with) concerning the potential future course of fed rate actions by examining the shape of the yield curve.

Econobrowser writes,

If we were to trust the expectations hypothesis at the moment, what would it tell us? The initial sharp upward slope suggests that investors expect one more Fed rate hike to come soon, perhaps the next meeting. But the fact that the yield curve then begins to slope sharply down suggests that investors are betting on rate cuts later on-- otherwise, rolling over 6-month bills at 5.23% would beat any longer-maturity bets.

And what kind of scenario would have the Fed reversing course and starting to lower rates 6 months from now? Given recent inflation observations, it's hard for me to imagine the Fed lowering rates in the near future unless we get a significant slowdown in economic activity that makes it worry a lot more about the prospects of an economic recession. [more]