| Title: | Market Investing |
| Moderator: | 2155::michaud |
| Created: | Thu Jan 23 1992 |
| Last Modified: | Thu Jun 05 1997 |
| Last Successful Update: | Fri Jun 06 1997 |
| Number of topics: | 1060 |
| Total number of notes: | 10477 |
Here's a semi-hypothetical situation. I will want to buy a house
(and a mortgage) in 3 years. I think interest rates are going to rise
over the next 3 years, making that mortgage more expensive than it would
be today. What is the most cost-effective, least risk way to protect
myself from interest rates rising over a 3 year period? Something like
buying put options on bonds would accomplish this -- as bond prices
fall (and interest rates rise) the options will rise in value. Are
there any such instruments that would cover a 3 year period? Which
bonds (treasury, some bond index, etc.) should the option be for?
Futures are too risky -- if rates fall I don't want to have a potentially
huge loss.
Thanks for any ideas.
Marc
| T.R | Title | User | Personal Name | Date | Lines |
|---|---|---|---|---|---|
| 516.1 | CAPs | SUBWAY::DAVIDSON | On a clean disk you can seek forever | Tue Jul 06 1993 11:41 | 3 |
There is an OTC instrument called an interest rate cap.
I don;t know how much it would cost or if you could buy one.
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| 516.2 | No futures options that far out | VMSDEV::HALLYB | Fish have no concept of fire | Tue Jul 06 1993 13:39 | 40 |
The short answer is no. While some futures contracts go out that far,
no options do.
The contracts to consider are the T-bond contract and T-note contracts
of various duration. They have options that go out about a year, so
you'd have to buy and then roll over. Which means you still incur a
certain amount of risk of a gradual rise in rates commensurate with
implied contract volatility. But I think that's more a boundary case.
If and when rates rise they will probably rise quickly and sharply:
all the banks, thrifts and brokers who have been playing the yield curve
will run to lock in their interest rate risk. So if you pursue a
roll-over course and rates rise sharply, you will likely be covered.
_Barron's_ does a pretty good job of listing futures options. Bond
and note \options/ are priced in $K and 64ths, so 2-16 is $2500.
Here's a quick table of translation from bond strike price to interest rate:
Bonds 30-year %
112 7.03
110 7.18
108 7.34
106 7.49
104 7.66
102 7.83
100 8.00
98 8.18
96 8.37
94 8.56
As you can see, a move from 7% to 8% corresponds to a move from above
112 to 100 ... over $12,000 value. This might help you decide what
strike prices you can afford.
A second consideration would be to look thru (_Barron's_, again) the
list of LEAP options on stocks, looking for long-term options on
interest rate sensitive stocks such as banks or Fannie Mae. That would
be a different path to consider alone or in conjunction with the above.
John
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| 516.3 | BROKE::ZEHNGUT | Wed Jul 07 1993 10:04 | 6 | ||
John, Thanks for the interesting and informative reply. Seems like there are a lot of different ways to play the interest rate market. Marc | |||||