How are short-term interest rate (STIR) futures priced and quoted?

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AcadiFi · Accepted Answer

STIR futures quote as 100 minus the interest rate, creating an inverse relationship between price and rate. A SOFR future quoted at 95.50 implies a 4.50% rate. Tick size is 0.005 price (half a basis point), worth $12.50 per contract ($25 per full bp, $100,000 notional times 0.25 year times 0.0001). Pricing reflects the market-expected average reference rate over the contract period.

For SOFR futures, settlement is to the arithmetic average (1-month) or compounded average (3-month) of daily SOFR fixings during the reference period. Stellaris Macro Fund uses the SR3 June contract to hedge a $50M floating-rate loan priced to 3-month compounded SOFR. At 95.125, the implied rate is 4.875%. Convexity adjustments apply as the contract sits further out the curve. Dealers quote strips of consecutive quarterly contracts (the 'pack' and 'bundle' structure) to hedge swap exposures.

```mermaid
flowchart LR
  Spot[Current SOFR] --> Expect[Expected Path]
  Expect --> Avg[Compounded Average]
  Avg --> Rate[Implied Rate]
  Rate --> Price[100 - Rate]
  Price --> Quote[STIR Quote]
```

How are short-term interest rate (STIR) futures priced and quoted?

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