Question

On Tuesday December 16, 2008 at 2:15 pm the FED has announced that the Fed Funds Rate (FFR) is cut by 75 basis points, from 1 percent to 0.25 percent. On the same morning, prior to the announcement, the FFR obtained from the January 2009 futures contract was at 0.21. What was the implied probability of a 75 BP cut vs. a 100 BP cut?

Answer 1

On Tuesday December 16, 2008 at 2:15 PM the FED has announced that the Fed Fudns Rate (FFR) is cut by 75 basis points, ie, from 1% to 0.25%. On the same morning, prior to the announcement, the FFR obtained from the January 2009 futures contract was at 0.21 Calculate the Implied Probability of a 75 BP cut Vs. 100 BP cut: The following is the formula to calculate the Implied Probabiliyt of a given FFR Im plied Pr obability (P)- FFR-FF) Here, P-Im plied Probability of Fed move FF-Fed finds rate implied by fitures contract price, i e (100-contract priceinbp) FF-Current Fed finds targetrate FFR-Fed finds targetassu ming25np hikes Here, the futures contract price can be converted in bp's ie. (1-021) * 10 (79-75) し(79-75)」 Im plied Pr obability (P)- -100%Probability