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Just like you can buy a stock and take possession of it today, you can also make arrangements to buy a stock tomorrow at a pre-determined price. 

Contracts to buy a fixed amount of something in the future is called a "futures contract" (duh!) and it gives us a glimpse into how traders think a particular event "will go down".

Futures can be a daunting subject, so let's make it simpler by comparing futures contracts to sports gambling.

After last season in the NFL, the Philadelphia Eagles were thought to be a lock to win the 2006 Super Bowl.  Coming off a loss in the 2005 Super Bowl, the birds had managed to keep most of their players and were gelling as a unit.

Shortly after the 2005 Super Bowl loss, Las Vegas oddsmakers put 7-2 odds on the Eagles to win the next year' Super Bowl.  7-2 odds is a 28% likelihood.

And then things went horribly wrong.

First, Terrell Owens lashed out at Donovan McTurtle.  Then, Andy Reid lashed out at T.O.  And once the team reported to training camp, the injury bug hit. 

First Donovan.  Then Owens.  Then Brian Westbrook.  And the losses mounted.

As the Eagles' future grew more bleak with each passing week, the oddmakers actively changed their expectations for the Eagles to win the Super Bowl. 

Last week, the likelihood of the Eagles winning the 2006 Super Bowl had dropped to 3.33%, or 30-1.

Today, there are no odds. 

The Eagles are now mathematically eliminated from the playoffs and so the probability of the Eagles winning the Super Bowl is 0.00%.  The oddsmakers have taken the Eagles off the board for betting.

And in this way, we can better understand Fed Funds Rate Futures. 

Just like betting on the Eagles outcome at the Super Bowl, traders can bet on what the Fed Funds Rate will be after a Federal Open Market Committee meeting.

For today's FOMC meeting, the oddsmakers (i.e. traders) have set the odds of 0.25% Fed Funds Rate hike at 100%.  They've also set a 100% certainty for the January 2006 meeting.

Because of these expectations about the future, the same traders have made other bets, too.  If the playing field changes at all -- like it did for the Eagles -- those bets will change, too.

According to the Fed Funds Rate futures market, there's a 38% probability that the Fed will raise by another 0.250% in March 2006.

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Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.