|
PureBytes Links
Trading Reference Links
|
Got my handles wrong on the comment. The prices are all with 93 handles.
100-6.5 = 93.50. Sorry for any confusion.
Steve Poser
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
-----Original Message-----
From: listmanager@xxxxxxxxxxxxxxx [mailto:listmanager@xxxxxxxxxxxxxxx]On
Behalf Of trader
Sent: Thursday, June 15, 2000 6:48 PM
To: realtraders@xxxxxxxxxxxxxxx
Subject: [RT] Fed Funds and probability of hike rate
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
|