Educational Insight What Is IMM Quarterly Sonia Futures?
Just like the Eurodollar Futures, the IMM SONIA Futures trades in index points. This video explains how to trade it...
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We just have a quick question here from Dominic asking about the IMM Quarterly SONIA Futures that he's seen us using our videos and the chats before just asking what exactly are they? And how can we use them?
So thanks for the question, Dominic. Now the term SONIA in Quarterly SONIA Futures refers to the Sterling Overnight Index Average. And that's basically just an index from the BoE, from the Bank of England. That is used as a preferred reference rate for the Sterling OIS or the Overnight Index Swaps.
Now, in terms of the IMM SONIA Futures, the IMM just stands for International Monetary Market. And it's a Futures contract that is basically the equivalent of the Eurodollar Futures. So where we use Eurodollar Futures, you've seen us use these before. Where we use the Eurodollar Futures as a short term interest rate product that tracks implied rates for the fade we use the IMM Quarterly SONIA Futures.
It's basically the exact same thing, but we try to track implied rates for the MPC or for the Bank of England. Now you'll also get different types of ones. So this is the one that we like to use the Quarterly IMM SONIA Futures. But you also get one that's called the MPC SONIA Futures, you can also get that on Trading View, but they only look forward to a few months where each of the contracts will reflect the upcoming MPC meetings for the specific year. So we have five left.
If we go to the MPC now, let's just type in MPC. On direct you should see about five or six left. so you'll get the continuous one. And then you get May, June, August, September, November up to December. So you get for all the remaining meetings. What I don't like about that is, I wanna see what's going on. You know, what the rates market is pricing in for next year, and what the markets are pricing in for 2023 and 2024. And that's where I like the Quarterly Futures for, because that gives you like the Eurodollar Futures. It gives you a lot more scope to go further out in the future.
Now, just like the Eurodollar Futures, the IMM SONIA Futures trades in index points. And that means that you can basically take whatever the implied contract prices.
You take 100 and you subtract that implied contract price to get an implied interest rate for that specific contract.
So for example, let's just take the June one. And you can see that it's currently priced in at 99.835. So if we just get our calculator out here for a second. So you basically just take 100 and you subtract the contract price and that is 99.835 at the moment. And that gives you 16 basis points or an implied MPC cash rate at the time of 0.16%.
Now, we know that the current cash rate for the MPC is 0.1%, right? So if we subtract the current rate that'd be currently trading at with the cash rate. And we subtract that implied rate of 0.165%. We get six basis points. That means that for June, 2022, the market is currently pricing in six basis points worth of hikes, for The Bank of England by June, 2022.
Now, obviously they normally move in increments of 10 basis points at a time. So the markets, based on this, isn't yet pricing in a rate hike right now based on this price for the BoE by June, 2022. So let's just take another one to do the same example. I believe this is the December one. Let's just double check. Yeah, so that's the same for 2022, you can see that's gonna be priced at 99.710. So if we take 100 and subtract 99.710 that should give us 0.29 basis points or an implied cash rate at the time of almost 0.3%.
Now because they move again at 10 basis points at a time when we know that the current rate is 0.1%. That gives us a total of almost 20 basis points of rate hikes price in for the Bank of England by December, 2022. And because they move 10 basis points at a time, that means that the currently rates markets or according to the SONIA Futures is pricing in 0.2 rate hikes for the BoE by December, 2022.
So it's really the same thing that we use for the Eurodollar Futures as well. It's just the SONIA Futures referencing to the cash rate for the BoE, where the Eurodollar Futures, of course, references the federal funds rate on the US side.
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