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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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