Thursday 6 June 2013

How to read the futures market pricing

I mentioned in a previous post that the financial futures market is picking a modest rise in the 90 day bank bill rate by this time next year.

From time to time you might like to know how to look this up for yourself: it's always useful to know where the financial markets think interest rates are going. They may not prove to be right, but they do give you the best stab at the most likely outcome that you're going to find.  Here's how to find it.

First, go here- it's the page on the Sydney Futures Exchange (SFE) website that shows the current prices being quoted. Below, I've got a snapshot of what you'll find: it shows yesterday's prices from that page. I've circled the 'Last trade' column, which is the one you want.

You'll notice that there doesn't seem to be anything here that looks like the current bank bill rate (2.64%): all the prices quoted are in the high 90s. The trick is - subtract the prices you see from 100.

Example: the 'Last trade' for the December 13 futures contract was at 97.25. Subtract this from 100, and you get 2.75. VoilĂ  - 2.75% is the futures market's best current guess at where the 90 day bank bill rate will be in December '13.

You can also do the same thing for Australian short term interest rates here.

If any of these links go down, by the way, you can also find them by going to the ASX homepage (the SFE is part of the ASX), clicking on 'Prices & Research' (top left of the page), clicking on 'ASX Futures' (at the right of the line of tabs going across the page), and up will come a page showing all the contracts traded. Click on the contract you're interested in - Aussie banks bills are on the left, NZ bank bills towards the bottom right - and up will come the page I've snapped above. The same 'subtract from 100' method applies to all the interest rate contracts (but not to commodities, where the expected price can simply be read off directly).

You can also see, by the way, that the futures market has a view only out to about 5 or 6 quarters ahead: the volume of contracts traded (shown in the column second from the right) drops off for September '14, and there were no trades at all on dates beyond that.

It won't give you forecasts way into the future - probably no great loss, as I'd wonder how accurate they'd be that far out - but within its limits it's a very good insight into the most likely near-term track for interest rates.

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