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- 2011-7-11
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- 2014-8-7
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14#
发表于 2011-7-11 19:27
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smileygladhands Wrote:
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> Here was my thought logic on C -
>
> If I am "short" a floating rate bond, that means i
> am PAYING, not receiving, a floating rate of
> interest. So as interest rates go up, i must pay
> more interest. Therefore, my problem would be
> rates going up, so i need an instrument where i
> will be the winner when rates go up:
>
> (a) - sell a cap - no good - i receive a premium
> and must make payments when rates go above a
> strike rate - doesn't offset my risk, as "i win"
> when rates stay low.
>
> (b) buy a floor - also no good - i pay a premium
> and receive payments when interest rates go down -
> doesn't offset my risk, because "i win" when rates
> decline
>
> (c) - buy a cap - i pay a premium and receive
> payments when interest rates go up - this is what
> i need. On my initial instrument, i "lose" when
> rates go up, because i'm paying a floating rate.
> Therefore, I need this instrument because it pays
> me when rates go up.
>
> So if rates go up, i'm screwed on my floating rate
> bond due to increased coupon payments, but my cap
> kicks in and acts like "insurance' because i now
> receive payments from the person that sold me the
> cap.
>
> I find that sometimes thinking of it in terms of
> coupon payments, as opposed to value of the actual
> bond itself, can help.
Just to add one thing: The above is correct if the cap has an interest rate as the underlying- i.e. LIBOR. So if the cap is LIBOR + 200 bp, then yes, you want to purchase this to hedge your short floating bond risk.
However, you can also have interest rate caps/floors when the underlying instrument is a bond. If the underlying is a different floating rate bond, then you want to do the opposite, because interest rates and bond prices move in opposite directions.
Just be aware of the underlying when looking at these. Chances are it'll be LIBOR, but there is potential for a curve ball here. |
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