Interest Rate and Hedge

Discussion in 'Options' started by traderharley, May 11, 2012.

  1. I am going to use cash to buy a Short Sale home as an investment property, because it is a good deal and lender only take cash offer. I talked to my loan officer and was told I can cash out after 6 months of purchasing the property, but I am afraid of the interest rate may be higher than the current interest rate, so I need to hedge but do not how? Could you please tell me what kind of instrument I need to purchase? Thank you so much for your advice.
     
  2. I would think that the cheapest and most effective way to hedge against interest rate hikes over the next 6 months would be as simple as a 6 month loan, like a mortgage.

    I think options would be too expensive too buy, and too risky to sell.

    :)
     
  3. Thank you qqqoptions.
     
  4. TskTsk

    TskTsk

    Forward rate agreement I think? Not sure...
     
  5. just buy puts on tlt.
     
  6. Thank you Frank, I know nothing about interest instrument, could you elaborate? What is tlt? Is it ishares Barclays 20+ YR TRES BOND FD? If so, how many put contract can hedge $250,000?
     
  7. sle

    sle

    TLT puts it is. You are trying to hedge a 30 year mortgage which has an WAL of about 15 with TLT, which also has duration of about 15. So, you just need the same notional amount to hedge. So, 250/119 which is about 2100. You approximate cost of hedging would be 15k if you buy ATM puts - you have to decide if the hedge is worth the money. Personally, I'd say "not".
     
  8. Thank you sle. I think the hedging cost is high too, and I hope interest rate won't increase that much in 6 month.
     
  9. newwurldmn

    newwurldmn

    Why not short the TLT?