Do I understand CME fed rate futures?

M

MK020

Basic question to see if I understand these right... Take the Sep 2024 contract (ZQU4). The fed rate is currently between 5.225 and 5.500, so call it 5.375. If the fed decreases the rate on September 18th by 50 points, it would be 4.875. The contract pays out the average rate over the month, so in the case of a 50 point decrease in rate, that would be:

5.375 * (18/31) + 4.875 * (13/31) = 5.1250.

Therefore, the payout for owning a September contract would be:
(100 - 5.1250) * 4167 = $39534

Do I understand how these contracts work correctly?
 
MK020 said:
Do I understand how these contracts work correctly?
More...
  • Price calculation
    The price of a Fed Fund futures contract is calculated by subtracting the implied rate from 100. For example, if the average monthly Fed Funds rate is 5.50%, the futures price would be 100 - 5.50 = 94.500.

  • Contract size
    The minimum contract size is calculated by multiplying the contract price by $4,167.

  • Tick size
    • Nearest month: The tick size is one-quarter of one basis point, or $10.4175 per contract.
    • All other contract months: The tick size is one-half of one basis point, or $20.835 per contract.
 
schizo said:
  • Price calculation
    The price of a Fed Fund futures contract is calculated by subtracting the implied rate from 100. For example, if the average monthly Fed Funds rate is 5.50%, the futures price would be 100 - 5.50 = 94.500.
More...

I follow that. In your example the settlement value would be 94.5 * 4167. But what I'm asking is IF on Wednesday the fed drops the rate to the range 4.75-5.00 (mid of 4.87), then is the final mean rate of September going to be 5.125? That 5.125 is the weighed mean of the current rate (first 18 nights) and the lower rate (last 13 nights)? There wouldn't be any more anticipated rate changes after Wednesday, so the price of the contract should equal the settlement price and not move much until expiration, correct?
 
MK020 said:
I follow that. In your example the settlement value would be 94.5 * 4167. But what I'm asking is IF on Wednesday the fed drops the rate to the range 4.75-5.00 (mid of 4.87), then is the final mean rate of September going to be 5.125? That 5.125 is the weighed mean of the current rate (first 18 nights) and the lower rate (last 13 nights)? There wouldn't be any more anticipated rate changes after Wednesday, so the price of the contract should equal the settlement price and not move much until expiration, correct?
More...

Yes, once the Fed makes its decision, the price of the contract should ideally get close to the settlement price. If there are no other anticipated rate changes, the contract price shouldn't move much between Wednesday and expiration unless something unexpected happens in the market.

The Fed's target range for federal funds is 5.25% to 5.50%, with a midpoint of 5.375%, which haven't changed this since September 17 when they upped the target range by 25 basis points. And if the Fed drops the target range to 4.75% - 5.00% on Wednesday, that midpoint would shift to 4.87%. This new rate would be good for two weeks, from Wednesday until the end of September.

So here's my calculation of the WAR:
  • Weighted average rate = ((18×5.375)+(13×4.87)) / 31 calendar days = 5.162%
 
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