How are interest rate futures priced?

Okay, so you wanna know about interest rate futures pricing? It’s kinda tricky, but let me try to explain it in a way that doesn’t make your head explode. Basically, the price is all about what everyone thinks the interest rate will be – it’s a bit of a guessing game, right? I mean, who really knows what the Fed will do next? Crazy stuff!

They use this formula, something like 100 minus the expected interest rate. So, if people think the rate will be 6%, the futures price is 94. Simple enough, right? Makes sense…mostly. But then you get into the nitty gritty. Like, what if the experts think it’ll be 6.09%? Then it gets all wonky. The price becomes 93.91, which is actually 9391 basis points. Remember that! It tripped me up for ages when I first learned about it. I almost deleted my entire spreadsheet thinking I’d screwed up the calculation. The little details matter.

Think about it like this: you’re betting on what the rate will be in the future. If you think it’ll be lower than what’s currently priced in, you buy the futures contract, hoping to profit when the price goes up. If you think rates will rise, you might sell. It’s a bit like that time I bought those avocado futures, thinking the price would go through the roof. Didn’t work out so well – ended up with a mountain of avocados and a very sad guacamole situation. Lesson learned – don’t invest in anything you don’t understand… especially avocados. ???? But seriously though, interest rate futures are a bit similar – a gamble on future expectations. And, you know, sometimes those expectations are totally wrong!

#Finance #Future #Rates