1) Suppose that today is August 27, 2018, and the federal funds rate target is c

Question

1) Suppose that today is August 27, 2018, and the federal funds rate target is currently 3%. The current price of the September 2018 Federal Funds Rate Futures Contract is 96.9, and the Chicago Board of Trade has set the initial margin for this contract for a speculator at 350 and for a hedger at 320. The maintenance margin for all accounts is 320. Suppose that the next meeting of the Federal Open Market Committee is September 12, 2018. The meeting after that is scheduled for November 13, 2018. The November contract sells for 96.6. Answer the following:

A. What can you infer about market expectations for the actions of the Federal Open Market Committee, at the September meeting, in light of these market conditions? Provide a list of key assumptions you make in obtaining your answer.

B. What do you think the price of the October contract should be? Explain.

C. What does the market expect the Federal Funds rate to be in the month of November?

D. What can you infer about market expectations for Federal Reserve Policy in November in light of these market conditions? Provide a list of key assumptions you make in obtaining your answer.

Explanation / Answer

Based on the assumption increasing forward federal fund interest rate, the market can expect decereased infusion of cash flow in the economy. The banks will buy the federal securites which will be at higher rate to meet their reserve requirement.

Answer 1 Interest Rates August Spot Rate 3% Sept Future Rate 3.1% Nov Future Rate 3.4% Based on the data available market is expecting an increase in the interest rates Answer 2 Monthly yeild over next 2 months =((3.4%/3.1%)^(1/2) -100) 4.7% Oct Future Rate =3.1%*(1+4.7%) 3.2% Answer 3 Expected Nov Federal Fund rate =100-96.6 3.4% Answer 4

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