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I think you slipped a digit, Lionel. 0.9450-0.94435 is 0.00065, not 0.065
----- Original Message -----
From: "Lionel Issen" <lissen@xxxxxxxxx>
To: <metastock@xxxxxxxxxxxxx>
Sent: Friday, June 16, 2000 10:42 AM
Subject: Re: Fed Funds and probability of hike rate
> Glen:
> Please clarify the math for me. when I put in the correct decimal values
> instead of points or percents I get 26. This is 2600 percent.
>
> (0.9450-0.94435)/(0.9450-0.9425) =0.065/0.0025 = 26 or 2600%
> Lionel Issen
> lissen@xxxxxxxxx
>
>
> ----- Original Message -----
> From: Glen Wallace <gcwallace@xxxxxxxx>
> To: MetaStock listserver <metastock@xxxxxxxxxxxxx>
> Sent: Friday, June 16, 2000 9:40 AM
> Subject: Fw: Fed Funds and probability of hike rate
>
> > I thought this would be of interest here. A small error in the math, but
> > the logic holds. Forwarded with permission ....
> >
> >
> > > Alberto -
> > >
> > > That is my specialty. In fact, there is a good chance that the quote
> > > came from me or an acquaintance of mine, Jim Bianco, especially if
> > > it was Bridge News.
> > >
> > > The whole calculation can be complex, but in this case it is pretty
> > > simple. The July futures trade at 94.435. Since there is no meeting
> > > in July, if the Fed leaves the funds rate unchanged, fair value for the
> > > contract is 94.50. If the Fed increases on 28-June, the fair value is
> > > 94.25. We get this by subtracting the funds rate from 100. The
> > > current rate is 6.50%. A 25 basis point hike would be 6.75%. The
> > > current odds then are (94.50-94.435)/(94.50-94.25) =6.5/25.0
> > > = 26%.
> > >
> > > The calculation is somewhat more complex if there is a meeting
> > > during the month, and it is more complex when there are multiple
> > > meetings since you have to get into conditional probabilities, but in
> > > this case, it is absolutely correct.
> > >
> > > By the way, I have spoken with Fed officials, and they watch this
> > > number closely and compute the odds in exactly this manner, to
> > > see what the market is thinking. The funds futures measure WHAT
> > > THE MARKET THINKS THAT THE FED WILL DO. If the
> > > Fed does not want to surprise the market, that is what they
> > > will do. The contract has been correct for something like 30 straight
> > > meeting. Based on where it is now, the Fed will not increase in June.
> > >
> > > Steve Poser
> > > ---
> > > Steven W. Poser, President
> > > Poser Global Market Strategies Inc.
> > > http://www.poserglobal.com
> > > swp@xxxxxxxxxxxxxxx
> > > Tel: 201-995-0845
> > > Fax: 201-995-0846
> > >
> > >
> > >
> > > Realtraders,
> > >
> > > Here is an excerpt taken from a news agency some days ago:
> > >
> > > >"Prices of July Fed Funds reflect a 48% chance of a 25bps rate hike at
> > > >the June 27/28 meeting. That probability is almost 30% higher than
> > > >what was prices in after last week May payroll data."
> > >
> > > What's the calculation to extrapolate the probability of a FED hike from
> > > the July Fed Fund price?
> > >
> > > Thanks for your comments.
> > >
> > > Regards,
> > > Alberto
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