The Canadian Monetary Policy Market is a real-money futures market that attempts to predict the monetary policy decisions of the Bank of Canada. Contract payoffs are determined by major monetary policy decisions, in particular with respect to raising and lowering the overnight rate, through which the Bank of Canada influences short-term interest rates.
The overnight rate is the interest rate at which major financial institutions borrow and lend one-day (or "overnight") funds among themselves; the Bank sets a target level for that rate. This target for the overnight rate is often referred to as the Bank's key interest rate or key policy rate. Changes in the target for the overnight rate influence other interest rates, such as those for consumer loans and mortgages. They can also affect the exchange rate of the Canadian dollar. In November 2000, the Bank introduced a system of eight fixed dates each year on which it announces whether or not it will change the key policy rate (see table below).
There are three contracts offered in each Canadian Monetary Policy Market. This is a "winner-takes-all" type of market in which only one contract pays $1, and all other contracts pay $0. Contract "HGH" pays $1 if the Bank of Canada increases the overnight rate, contract "LOW" pays $1 if the Bank of Canada decreases the overnight rate, and contract "UNC" pays $1 if the Bank of Canada leaves the overnight rate unchanged.
There are up to eight Canadian Monetary Policy Markets each year. The market symbols are the letters "CMP" for Canadian Monetary Policy, followed by two digits for the year, followed by a letter (A-H) for the sequence of decision dates in a given year. For example, CMP13B is the market for the second announcement date in 2013, which is 6 March 2013.
Bank of Canada Target for the Overnight Rate | |||
---|---|---|---|
Date | Target (%) | Change (%) | CMP Market |
18 January 2011 | 1.00 | — | |
1 March 2011 | 1.00 | — | |
12 April 2011 | 1.00 | — | |
31 May 2011 | 1.00 | — | |
19 July 2011 | 1.00 | — | |
7 September 2011 | 1.00 | — | |
25 October 2011 | 1.00 | — | |
6 December 2011 | 1.00 | — | |
17 January 2012 | 1.00 | — | |
8 March 2012 | 1.00 | — | |
17 April 2012 | 1.00 | — | |
5 June 2012 | 1.00 | — | |
17 July 2012 | 1.00 | — | |
5 September 2012 | 1.00 | — | |
23 October 2012 | 1.00 | — | |
4 December 2012 | 1.00 | — | |
23 January 2013 | 1.00 | — | |
6 March 2013 | 1.00 | — | CMP13B |
17 April 2013 | 1.00 | — | CMP13C |
29 May 2013 | 1.00 | — | CMP13D |
17 July 2013 | — | — | CMP13E |
4 September 2013 | — | — | CMP13F |
23 October 2013 | — | — | CMP13G |
4 December 2013 | — | — | CMP13H |