Best way to hedge against rising uk interest rates?

[Tantalus]

If one was to release equity through refinancing through a Tracker mortgage, and enjoy the benefit of flexibility and current low rates, how could one limit risk to rising interest charges if the BOE base rate was to rise this/ next year?

Thanks for any ideas,
Tantalus

 

[gooseman]

sell short sterling futures/downside put option.

 

[anley]

You can't really do it with small money, small being less than £1m, pref £5m+. Plus it's complicated unless you really know what you're doing.

 

[Tantalus]

sell short sterling futures/downside put option.

Okay, so if we were to try and construct a simple strategy for someone who wanted to hedge a modest sum and not +1000,000, we could start by taking a short position on a short sterling SB with a £1 a point. This would equal around a 5th of a full size LIFFE contract, so equal to £100,000 on deposit? Not sure how you'd use options in combo with this. Any ideas? Thanks
Tantalus

 

[arabianights]

You would buy short sterling puts but again you can't do that at a pound a point... In my opinion selling gilts or buying gilt puts will be a better hedge as the factors that would lead to higher interest rates will probably affect gilts more; on the other hand there isn't that much upside to them.

Also with the current state of the short sterling market a spread betting position will almost certainly stop you out next time there's a deutsche fat finger...

 

[Tantalus]

You would buy short sterling puts but again you can't do that at a pound a point... In my opinion selling gilts or buying gilt puts will be a better hedge as the factors that would lead to higher interest rates will probably affect gilts more; on the other hand there isn't that much upside to them.

Also with the current state of the short sterling market a spread betting position will almost certainly stop you out next time there's a deutsche fat finger...

Thanks for your that. It certainly isn't as straightforward as I thought it might be! There must be a way though: a challenge that I'll keep working on?:smart:

i Shares £ Index linked gilt?

 

[Hoggums]

Get a fixed rate on your mortgage when rates are low.

 

[Futumpch]

Short Sterling and Interest Rates Spread Betting

seems to have some ideas

 

[Tantalus]

Get a fixed rate on your mortgage when rates are low.

I see the point Hoggums, but the best current fixed is 1.5 points higher than the best tracker and I'm thinking will fixed offers ever fall to <3.2?

Tantalus

 

[Tantalus]

Short Sterling and Interest Rates Spread Betting

seems to have some ideas

Thanks, Futumpch, looks interesting.

 

[anley]

Buying options as a hedge doesn't work unless your timing is perfect and assume that it won't be.

What happens for example if you spend £1000 on a put, the market doesn't move and the put expires worthless. So you do it again, and again the market doesn't move and the put expires worthless.

That's not a hedge - it's a lesson in how to lose money when attempting to hedge.

 

[Tantalus]

Buying options as a hedge doesn't work unless your timing is perfect and assume that it won't be.

What happens for example if you spend £1000 on a put, the market doesn't move and the put expires worthless. So you do it again, and again the market doesn't move and the put expires worthless.

That's not a hedge - it's a lesson in how to lose money when attempting to hedge.

It's the old problem with options, anley, ain't it, decay and the time imperative. Don't know enough to use them comfortably (whose timing is perfect!) although have TRADED them intraday (in the money, near expiry) in place of the physical. Could not use them for this little conundrum though, as you rightly point out, time is too loose here, need something that tracks and maintains a permanent hedge.

Tantalus

 

[red army]

If one was to release equity through refinancing through a Tracker mortgage, and enjoy the benefit of flexibility and current low rates, how could one limit risk to rising interest charges if the BOE base rate was to rise this/ next year?

Thanks for any ideas,
Tantalus

simple - try and buy the all weather term tracker from Cheltenham and Gloucester, ride the rates down and when the market tells you (late 2009/early 2010) that we could be squeezing out of this mess and the inflation bubble hits - revert to a good low fix rate and no cost........Messing about with short sterling/gilts is a mad hedge.

 

[Adamus]

the inflation bubble? What am I missing here?

 

[anderio04]

Online Savings Account Rates

this will help you in saving some of your hard earn money..............
====================
Seo Servicess