Short-Term Interest Rate Futures

A corporate treasurer wants to lock in today what a short-term borrowing rate will be three months from now, without actually borrowing anything yet. A hedge fund wants to bet purely on whether the central bank will cut rates next quarter, without touching a bond. Both trades are done in the same instrument: a short-term interest rate (STIR) future, a contract that settles based on where a benchmark rate like SOFR ends up over a defined period.

Reading the price as a rate

If 3-month SOFR futures for the March contract trade at 95.75, the market is pricing an average SOFR of $100 - 95.75 = 4.25\%$ over that contract's reference period. Each contract typically references a specific quarterly period, so stringing together the near contracts (the "SOFR futures strip") gives a market-implied path for where short rates are expected to go, meeting after meeting.

Worked example

A trader believes the central bank will cut rates more than the market currently expects by the September meeting. The September SOFR future trades at 95.75 (implying 4.25%). The trader buys 100 contracts. Each basis point of price move on a standard 3-month contract is typically worth $25 per contract. If the future rallies to 96.00 (implying 4.00%, i.e. rates 25bp lower than priced), that's 25 basis points of move:

$$100 \text{ contracts} \times 25 \text{ bp} \times \$25/\text{bp} = \$62{,}500$$

The trader profits $62,500 from correctly anticipating a lower rate path, without ever borrowing or lending a dollar of actual cash.

What this means in practice

STIR futures are the primary tool for hedging and speculating on near-term central bank policy because they're liquid, standardized, and settle against a transparent published rate. A bank hedging its floating-rate loan book, a macro fund expressing a view on the next few meetings, and a swaps desk hedging the front end of its curve all trade the same contract for different reasons.