Hi, I’m considering the cost of hedging an ARM I’m into. Does anyone know if there’s an investable index tied to the 1-Year LIBOR or something that has some significant correlation with it? The closest investable index I’ve found so far is the 5-Year treasury, but I’d like a little stronger hedge. Thanks Rick
What rate is your ARM tied to?
cfa say’s you should short a 2 & 10 year treasury.
mpnoonan Wrote: ------------------------------------------------------- > cfa say’s you should short a 2 & 10 year treasury. What? That is to hedge an MBS, not an ARM which is tied directly to a short term rate. I would assume he is looking only to hedge the upside move on the rate and not the downside.
Exactly, I have a 5 yr ARM that’s going to expire in Oct 2010. Actually, I’m not sure I need to hedge right now, since the rate I’d be paying is 3.9% if it floated today. I’m trying to protect against rising interest rates so I’m just trying to get an idea of what it would cost to hedge if I chose to do so. An interest rate option would be ideal, but I’d be willing to use options as well. The ARM is tied directly to the 1-Year LIBOR.
Options on an index I meant to say
Why not play the futures? Only problem is you’ll need to open a futures account, which normally requires a bit of margin.
mwvt9 Wrote: ------------------------------------------------------- > mpnoonan Wrote: > -------------------------------------------------- > ----- > > cfa say’s you should short a 2 & 10 year > treasury. > > What? That is to hedge an MBS, not an ARM which > is tied directly to a short term rate. > > I would assume he is looking only to hedge the > upside move on the rate and not the downside. You are right. It was right before lunch and should not have posted. clearly my mind was elsewhere.
how about a payer swaption? unfortunately you may have an issue finding a counterparty to take the other side for such a nominal amount…