Sarah Tomori, a former star basketball player for the NY Liberty is now a a fixed income analyst at Chelsea Investments. Tomori specializes in money market instruments. She is exploring whether her fund should be equal weight, underweight or overweight duration for the upcoming year. Target duration is typically 12 months, but Tomori is permitted to drift from the target duration by plus or minus 4 months depending on her view of the market. As part of her initial research, Tomori investigates the market for Fed Fund Futures. Tomori believes she can extract the market expectations of short-term interest rate changes from the futures market. Current Fed Fund market detail is as follows:

The current federal funds rate target range is set between 2.75% and 3.00%. The strip of monthly expiry Fed Fund futures is shown below. ZQJO is the future expiring on the last day in Apr 2020 and ZQJ1 is the future expiring on the last date in Apr 2021. Final settlement occurs on the first business day following the last trading day.

ZQJ0	ZQK0	ZQMO	ZQNO	ZQQ0	ZQU0	ZQV0	ZQX0	ZQZ0	ZQF1	ZQG1	ZQH1	ZQJ1
97.125	97.105	97.085	97.045	96.955	96.95	96.865	96.845	96.625	96.620	96.595	96.880	96.870

The Federal Open Market Committee (FOMC), the 12-member group that sets the Fed Fund’s discount rate is scheduled to meet on the dates shown below. Assume the FOMC always changes the target rate range in increments of 25bp.

Meeting Date	Days to Meeting
29 Apr 20	18
10 Jun 20	60
29 Jul 20	109
16 Sep 20	158
5 Nov 20	209
16 Dec 20	249
27 Jan 21	291
37 Mar 3	340

1. Based upon the implied Fed funds rate, market participants expect the Fed Funds rate after the 29 Apr 20 Fed meeting to be closest to

1.             2.75%

2.             2.90%

3.             3.15%

2. The probability of a 25bp Fed funds hike at the 16 Sep 20 FOMC meeting, implied by the futures market is closest to

1.             100%

2.             50%

3.             70%

3. The term structure of Fed Funds implied by the futures market is

1.             Upward sloping

2.             Upward sloping, then a drop

3.             Downward sloping

4. In addition to analyzing market expectation of short-term interest rate changes, Tomori is trying to determine the market’s inflation expectations. To evaluate the markets inflation expectations, Tomori is most likely to assess

1.             VIX futures market

2.             US TIPS market

3.             Dividend swap market

Answer rating: 100% (QA)

1 315 2 50 3 Upward sloping then a drop 4 US TIPS market EXPLANTIO... View the full answer