Martinghoul
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You can ask your bank... They may or may not agree to do this, but collateral is the big question. RBS used to provide this service to their clients, but, needless to say, their appetite for these activities has somewhat diminished of late.
mrgecko, hows it going old boy.
can you elaborate on the mechanics of this please....not my area of expertise
thanks, already tried the bank
Martinghoul
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Depending on the maturity (and ccy) of the loan you may be able to do what MrG is suggesting...thanks, already tried the bank
arabianights
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Well, there's the complicated, mathematical answer, which you will find in textbooks with nasty things like convexity adjustments, or the arbianights quick n' dirty approximately correct approach: borrow at a floating rate and sell short sterling strip at £2.50 per point each relevant quarterly contract month for every £100k of capital... it's about right
Not sure you need to worry about convexity anyway, because you w'll be dealing with an SB who might not credit you interest on the margin (and if your term is less than 2 - 3 years, it's not really worth the effort anyway).
Other thing to be wary of is the inception dates - the Short Sterling future has a fixed (quarterly) expiry system, while your FRA (loan) will have a fixed tenure, not expiry (basically this means start the deal on the first day of a new quartely cycle).
What you are trying to do here is replicate the cash flows of the swap with two series of "loans" - a fixed (which you get from the bank) and floating (which is the Short Sterling spread bet). TBH I would do your homework before giving it a go.
Can you shed a little more light on the situation? Are you, say, locked into a floating rate mortgage and you want to fix it at the prevailing market rates?
Other thing to be wary of is the inception dates - the Short Sterling future has a fixed (quarterly) expiry system, while your FRA (loan) will have a fixed tenure, not expiry (basically this means start the deal on the first day of a new quartely cycle).
What you are trying to do here is replicate the cash flows of the swap with two series of "loans" - a fixed (which you get from the bank) and floating (which is the Short Sterling spread bet). TBH I would do your homework before giving it a go.
Can you shed a little more light on the situation? Are you, say, locked into a floating rate mortgage and you want to fix it at the prevailing market rates?
eliotsagor
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its a bit complicated, but the same principle as someone who has a variable/tracker mortgage/loan at 0.5 % uk base rate, who wants to switch to a fixed rate at as low a rate as possible, the longer the term the better.
thanks for the link but high street banks not at all interested in small retail clients (reasons as per hoggums comments), hence my query here. all the crap on your link must have been written pre summer 2007
In that case you will have trouble doing it yourself. Most (at least that I'm aware of) exchange traded interest rate products involve LIBOR at some point down the line, I can't think of any IR product with the base rate as underlying.
eliotsagor
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Have you tried calling HSBC? I am looking for the same thing.
They offered me a cap. Something along the lines of I pay £8,000 premium and if the rate goes above 3.5% in the next 3 years they pay the difference. They offered me 5 years out of the money (4.5% I think) for £15,000. This is on a mortgage of £531,000 hence the high premiums. Obviously you loose the premium but you keep the lower payments should rates stay below the swap rate.
So I take it you are worried about hyperinflation and high rates??
What's your opinion on where rates willl go in the next few years?
You might be able to take the caplet route through a SB'er too... or even use options on Gilts which might better reflect your underlying rate (as a function of the base) - but you are getting into proper financial engineering here...
NB: A cap is just a series of caplets, options on interest rates. Also, personally I prefer taking the Gilt route if your floating rate is a function of Base rather than Sterling LIBOR - the reason is that if you are paying base but recieving LIBOR, you are exposing yourself to term-Sterling-TED risk (i.e. the difference in credit quality between AAA contributing banks and the UK G'ment... which is sheer lunacy... unless you are long, which I think you might be here???)
NB: A cap is just a series of caplets, options on interest rates. Also, personally I prefer taking the Gilt route if your floating rate is a function of Base rather than Sterling LIBOR - the reason is that if you are paying base but recieving LIBOR, you are exposing yourself to term-Sterling-TED risk (i.e. the difference in credit quality between AAA contributing banks and the UK G'ment... which is sheer lunacy... unless you are long, which I think you might be here???)
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Martinghoul
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There are no options on gilts... The caplet route sounds good. Otherwise, you're gonna have to live with doing short sterling and just running the LIBOR/base risk (that's not such a bad position to run, as you would be the right way on it).
eliotsagor
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You could short gilt futures??
Martinghoul
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Yes, MrG, LIFFE would like you to believe there's gilt options. However, if you look, open interest on them is and had always been 0. For all effects and purposes, they might as well not exist.
As to using gilts to hedge the base rate, there's all sorts of extra risks you're getting yourself into (asset swap being the biggest one). It's possible, but I would stick to LIBOR/base, personally, as I perceive it as a less dangerous and less complicated position.
As to using gilts to hedge the base rate, there's all sorts of extra risks you're getting yourself into (asset swap being the biggest one). It's possible, but I would stick to LIBOR/base, personally, as I perceive it as a less dangerous and less complicated position.