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Options on Bond Futures as an Interest Rate Hedge

Discussion in 'Investing Strategies' started by C3PO, 6th Mar, 2008.

  1. C3PO

    C3PO Well-Known Member

    Joined:
    28th Feb, 2008
    Posts:
    102
    Location:
    Adelaide, SA
    Hopefully this is the right place for this query:

    Like many people we have a pretty sizeable Standard Variable Home Loan, which we try our best to offset with an offset account. However, it has occurred to me that using Options on bond futures might be a way in which we could hedge our exposure to possible future interest rate rises.

    When interest rates go up, bond prices go down ---- so, to hedge against our rising borrowing costs, can we, as a normal everyday homeowner with a mortgage, buy a put option for 3-year Commonwealth Treasury bond futures? As interest rates go up, the value of the option would increase, and could be exercised upon expiry.

    I like the theoretical idea of the put option as it would be a fixed cost, so the potential for loss is limited to just the premium on the bond. We would buy one contract for every $100,000 we owe.

    Realistically, is the liquidity in these markets sufficient to enable this strategy to work? (the 3-year liquidity seems to be better than the 10-year at first glance). Am I crazy, or would this idea be a flyer?

    Anyone care to comment?
     
    Last edited by a moderator: 6th Mar, 2008