First thing first, CME has a tool to calculate fed rate hike probability from here.

As of 11/20/2017, their probability distribution was like this: enter image description here

I have checked a couple Q&A sections on this site and I think I understand their logic, for example this one. I also read CME's documentation. But still i was not able to back out the probability of 91.5% for a December 2017 rate hike using their fed fund future prices. I got a probability of 85.6905%. $$r1 = 100 - 98.8432 = 1.1562$$ $$r2 = 100-98.7125 = 1.2875$$ $$1.2875 = (1.1562*12 + r*19)/31$$ which implies $r = 1.370426$, and:

$$P(\text{hike}) = (1.370426 - 1.1562)/0.25=0.856905$$

What did I missed?

  • $\begingroup$ Did you ever figure this out? Is there a basis FFOIS/FedFundsRate that is not accounted for. What about the dates of the futures, are they 1st to 1st or IMM date to IMM date? Plus they are using some form of model. You can tell because they have multiple probabilities derived from a single price. $\endgroup$ – Attack68 Feb 21 '18 at 16:58

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