Traders can buy and sell futures contracts on the fed funds rate to hedge against interest rate risk. Traders will buy the fed fund futures if they believe the fed will lower the federal funds rate and visa versa if they believe the fed will increase the fed funds rate. He explains how to read the price quoted for the fed funds futures contract. One can use the fed funds futures to predict federal reserve interest rate policy. For example, if the current fed funds rate is at 2% and the fed funds futures are quoted at 97.5, this would indicate that traders expect the fed to drop interest rates by 50 basis points, or .5%. Remember, this contract trades at a price which is discounted by an amount of the fed funds interest rate expectation.
