hi. every time the fed is about to announce its policy i hear that the futures are implying a 75% probability of a 25bp rate cut. (the numbers here are just an example) now, i hope some of you guys can answer the following question. how can you read from prices of interest rate futures the probability of a rate cut? i understand how the futures prices can indicate the market expectation as to what the fed is going to do but the probability of the action? thanks for your answers in advance, rad
You need to know two things: 1) The CURRENT Fed Funds rate. http://www.money-rates.com/keyrates.htm 2) The current (today's) Fed Funds 30 day FUTURES contract. I use Interactive Brokers for the symbol, which is ZQN3 currently. However, an EOD quote is fine http://www.cbot.com/cbot/quotes/fin_futures/0,1860,FF+1,00.html Subtract the futures contract from 100, right now FFF are at 98.995, so 100 - 98.995 = 1.005 . Since the FED usually moves rates move in .25 increments, you can see that there is a very small probability of a rate cut (1 ~ 1.005.) You can do this for each month out... The probabilities are assinged by using retracements from current FFF levels in 10 basis points. Each 10 basis points account for approximately 20% more chance of a rate cut at that retracement. nitro
nitro, thanks for your answer. appreciate it. now i think i understand how it works. thanks again, rad