Tuesday, December 5, 2017

How did traders calculate that the expected number of rate hikes is 4 based on eurodollar futures on 15Feb2018?


https://www.bloomberg.com/news/articles/2018-02-14/bond-traders-swarm-2019-fed-hike-bets-after-inflation-surprise



After a Wednesday report showed consumer prices rose in January by more than projected, traders used eurodollar futures to express their view that central bankers have a clearer path to tighten. The expected number of increases from now until the end of next year is up to four, from 3.6 before the inflation report.




Answer



Yield of Dec19 Future - Current 3Months Libor / 25 bps (1 rate hike)


Libor 3M = 1.84 % Price of Dec 19 Future (Ticker EDZ9) = 97.18 = 2.82 %


Number of hikes = (2.82 - 1.84)/0.25 = 4


Please note these are very simplifying assumptions, as the 3 months Libor is just a proxy on the Fed Funds Target rate.



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