Hedging ARMs

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proofer2

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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
 
mpnoonan Wrote:
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> 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.
 
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:
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> 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...
 
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