10

Using the following data from 12/18/16: Jan 2017 Fed funds futures =9936, Jan 2018 Fed Funds futures =9877 implies that 99.36-98.77 = 59bp of hikes are built in for 2017. IF you assume the only two possibilities are 2 hikes or 3 hikes (meaning, 50bp or 75bp of hikes, assuming each hike would be 25bp), then by simple linear interpolation the probability of 3 ...


6

There's a lot of intracacies involved and you've got several options. Let's go through an example, using the current front-month 5-year contract FVU6 (FV expiring in September 2016). CTD Yield: The cheapest-to-deliver ("CTD") into FVU6 is the 1.625s of 11/30/2020 and its yield to maturity as of last close is 1.075%. You can simply use this as a proxy as the ...


5

The 3M futures are worth \$2500 per index point and the 1M futures are worth \$4167 per index point. The index is $$P = 100 - R$$ where R is the compounded SOFR (annualized) over the reference period. The contracts don't have a face value (they are defined in terms of the number of dollars per index point) but you can think of the 3M futures as having a \...


5

@Arrigo's answers are quite good; I'll try to beef up his points a bit more. Yield curves should be constructed using instruments of similar credit risks. If you're building a US Treasury yield curve, then you should use Treasury bills, notes, and bonds (although lots of people actually exclude Treasury bills because of market segmentation concerns). On the ...


3

Checking calculation with Bloomberg it seems that all 3 Korean bond futures contracts are of type (1). The pdf in the link must be out-dated.


3

it's easiest to see in terms of replication. The pay-off of a forward contract is $$ S_T - K. $$ We can replicate this precisely and statically by buying one unit of stock, $S_0,$ and $Ke^{-rT}$ riskless bonds growing at rate $r.$ So its value today is $$ S_0 - Ke^{-rT}. $$ This has zero value if and only if $K= S_0 e^{rT}.$ This value is then called ...


2

The forward price $F$ for a forward contract, determined at the contract inception time today, is the price that the holder will pay at maturity $T$ to buy the underlying equity. Then the payoff, at maturity $T$, of the forward contract is given by \begin{align*} S_T-F. \end{align*} The present value of the contract is then \begin{align*} e^{-rT} \mathbb{E}\...


2

When you buy a forward you don't have to invest any money, so that's to your advantage in a world of positive interest rates. To charge you the same as the spot rate would be unfair, you would be "getting something for nothing", that is why the appropriate price for a forward is higher. It takes the interest rate into account, balancing things out. In ...


2

I'll try to give you an answer. I think the term structure is built from those financial products because they are the most liquid for those maturities: theoretically, a liquid instrument has a price coming from a large consensus which you can think of the market. This is an "academical" reason, probably there are other reasons also (I'm still learning). ...


2

It is not taken from options. The numbers are taken from the Fed Watch tool provided by the CME, who list the Fed Funds Futures. There entire methodology is available here - which details several examples. If you "chain" successive months you will get the same answer. You can see this by selecting Dec 2018 with the tool and seeing the probability is ...


1

The real Fed Fund Futures are constructed by the exchange and set to run from start to end of a calendar month, so unfortunately there is no rolling future price. The "generic 1st" contract is just a placeholder which rolls from one contract to the next at the beginning of the month. The closest you are likely to get is the 1m USD OIS price; this is a fixed ...


1

Ignoring delivery option and margining, then you can treat bond futures like a bond forward. Like any forward contract, fair values of bond forwards are determined by $$ \text{forward price} = \text{spot price} - \text{carry}. $$ The calendar spread is therefore nonzero for several reasons: The underlying cheapest-to-delivers might be different, so both ...


Only top voted, non community-wiki answers of a minimum length are eligible