more upside soon. Time 2 buy
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100bps cut tomorrow factored in already?
- Thread starter turkeyneck
- Start date
Quote from Pippi436:
How do they calculate the chances of a certain rate cut with the futures? Someone got a link with an explanation/paper?
Hope this clears things up:
Explanation of the Various Estimation Restrictions
Single Meeting Estimation
This technique is used to derive implied probabilities for the March FOMC meeting. The probabilities are estimated using a restricted least squares (RLS) technique explained in "Recovering Market Expectations of FOMC Rate Changes with Options on Federal Funds Futures" by John B. Carlson, Ben Craig, and William R. Melick. The restriction is that the probabilities must sum to one. Sometimes, the RLS probabilities are not all nonnegative. In these cases, the probabilities are re-estimated with a nonnegativity constraint (subject to a low level of tolerance for constraint violations) using numerical techniques.
Typically the single meeting estimation technique is used whenever a FOMC meeting is not followed by another meeting in the following month. The probability density function (pdf) for March 2008 meeting outcomes can be estimated with the single meeting technique because there is no scheduled meeting until the end of April. Under the assumption that there are no intermeeting changes, April options and futures prices only embed the probabilities of alternative March FOMC meeting outcomes. In all the March meeting models, there is the implicit assumption that the average monthly effective rate in April is expected to hit the target fed funds rate chosen on March 18, 2008.
Futures Price Restriction (single meeting estimation)
The probability-weighted sum of the alternative target rates must equal the futures rate derived from the settlement price of the fed funds futures contract for which the underlying options were used to do the estimation.
In some cases, the nonnegative probability constraint may not be able to be satisfied simultaneously with the futures constraint. In these cases, the nonnegativity constraint is dropped, and the probabilities are estimated with the RLS technique.
Term-Premium Restriction (single meeting estimation)
The probability-weighted sum of the alternative target rates plus a one-basis-point premium for every 30 days until the futures contract of the underlying options expire must equal the futures rate derived from the settlement price of the futures contract. In some cases, the nonnegative probability constraint may not be able to be satisfied simultaneously with the term-premium constraint. In these cases, the nonnegatvity constraint is dropped, and the probabilities are estimated with the RLS technique.
They should cut 150 bps. Or 200. Being too timid is what allowed this to go from a problem to a crisis.
Quote from Pippi436:
How do they calculate the chances of a certain rate cut with the futures? Someone got a link with an explanation/paper?
Now the easy way
100-98.055= 1.945
A 1% cut is now 100% priced in
A 1.25% cut (1.75/1.945)-1 = 10 % chance of 1.25% cut
It gets in the ballpark anyway. I believe the Fed meets last day in April which would have to be considered. The March data is a little more complex since ou have to find out what the avg rate has been so far this month. I believe they show a higher chance of 1.25% cut.
The fed will cut 75 points ,which will be more than enough for a huge rally. Dont fight the fed.
Quote from S2007S:
Im telling you with the dow in the green after such a bad day for financials they should hold off on cutting any rates. They need the market to take care of itself and stop throwing money at it everytime it drops.
But it's an election year. They need to buy some votes here and there.