Thoughts? I've never traded Fed Funds Futures or the like. I think there is a better chance than what most ppl think that there will be no change. Whats the best way to play this?
short anything related to the real estate market but it is always better to stay with a primary risk factor, i.e. fed funds in this case...
sell the front contracts on eurodollar interest rate futures. sep 07 dec 07 etc. or better still but puts on dec 07 mar 08. they will sell the shit out of them if no rate cut or just a discount rate cut. the curve white to reds will flatten and reds to greens as well.
Shit, I don't know. They're high. =) One way to figure it: you sell Oct @ 96.16 (current bid). If you're right AND the effective rate tracks @ target, you win 41 @ settlement. If you're wrong, you lose 9 (again assuming the rate tracks correctly). So that's 41/9 = 4.56:1. Realistically, there's variance around the target. More importantly, if there's no cut, there's NO WAY October goes to 94.75, as the market will assume either lower tracking, an intermeeting cut, or both. I'd say your real odds selling @ 95.16 are a little better than 3:1.
you can't easily say bacause there are 3 possible outcome with only 2 contracts to derive it from, i.e. not enough info. on top of that effective rate is not trading very close to target additionally complicating the calcs. anyway - why would it matter? it is only risk neutral probability - not the real one. people hang too much on prob calcs based on ff futures. trade it based on what you think and look at the trade's risk/reward ratio - the best advice i can give you.