Trying to help a friend - Derivatives Query

Hi there folks,
Whilst I was once a futures trader and have a working knowledge of derivatives (enough to do what I need to do) , it is not my focus and I'm struggling to help out a friend who is working on a research project for a post-grad finance dilploma/degree.

Can anyone suggest a reference/link or any ideas for addressing the following sort of topic?? .........I have just quoted what she has sent me.

"I am currently attempting to complete my assignment and finding it difficult to explain interest rate hedging using derivative products to creat a "zero sum basis" .

The three areas I am attempting are:-

Swaps
Options
Futures "


Any suggestions appreciated. I'm assuming it's more complicated than just matching your $$ exposure to a rate move with a matching put/call on the bond market where the contract has the equivalent $ exposure.


Ed

Thanks for all the suggestions guys :

Turns out "zero sum basis" pretty much meant a simple hedge to negate risk so no need to reply if anyone was intending to.

Cheers,

Ed

Hi eddievanhalen,


Just saw your question. I do know how to do this, but it will take some time to prepare, and have a few things I have to get done...

Have a look at my hedging portfolios thread for some intital ideas.

For my PS 146 certification I had to deal with swaps, options and futures hedging... know it well.

Can you give me the full question - it can make a difference depending on the question.

Regards


Magdoran

She could probably find the info in her text book!

Future is easiest

Guaranteeing costs of funds using futures.

Company expects to borrow ~$1,000,000 in two months, thinks rates are rising and would like to lock in the prevailing rate.

They should sell forward the 90 day bill $1,000,000 face

Assuming in two months the company draws down their finance at rates above the rate 90 days ago - being short the face value which falls when rates rise, the futures contract will have profited by the same amount as the loss on the finance raising

She will need to prove this by pricing a 90 day bill using the original interest rate and rate at settlement to prove the gain on the sold futures contract and comparing this with the funds able to be raised by issuing a bond now and the actual amount raised issuing when rates are higher.

The easiest way to do it is to say - if rates do X, I will win/lose Y, I need to set up a bet that will lose/win by Y in this situation.

Thanks BSD and Magdoran- my friend and I got our wires crossed there a bit. Having worked futures myself I understand a simple hedge such as BSD described using futures or options on futures etc.......

Turns out she didn't provide me with the full detail of the question and I had never seen the term "zero sum basis" used and had wrongly assumed that because she'd asked (and because it was part of a research project outside the normal classes) that it was far more complicated than that.

In the end the report was due at 5pm today and I didn't get more detail until the last minute.

Thanks for your posts anyway and I appreciate the offer of help Magdoran.........turns out I wasn't provided with anything like the full question and didn't know it was all due in today either

I tried anyway........ .

Cheers,

Ed

Magdoran said:

For my PS 146 certification .......

Click to expand...

why keep plugging this?

do you think its a badge of honour or something?

are you hoping some will confuse this minor acheivement (all it means is you can meet employers min code for legal knowledge) with being a licenced advisor?

so you passed "Understanding Finance Law" (which is the only exam required for PS146.....heaps of people here have done that.) "....I had to deal with swaps, options and futures hedging..." well actually no you didnt. PS146 is all about LAW.....derivatives is a different exam entirely.

Now maybe you got a DFA or a DFM.....but since you think PS146 is the big acheivement and not the Diploma itself.......maybe not.

I figure its probably just a case of the new guy striving for some credibility......

Who would plug PS146?

Four diploma subjects, what a load

Anyway, sounds like someone missed their deadline for SIA E101 -Interest Rate Markets and Risk Management

Pay the $960 and go again!

MoneyTree said:

why keep plugging this?

do you think its a badge of honour or something?

are you hoping some will confuse this minor acheivement (all it means is you can meet employers min code for legal knowledge) with being a licenced advisor?

so you passed "Understanding Finance Law" (which is the only exam required for PS146.....heaps of people here have done that.) "....I had to deal with swaps, options and futures hedging..." well actually no you didnt. PS146 is all about LAW.....derivatives is a different exam entirely.

Now maybe you got a DFA or a DFM.....but since you think PS146 is the big acheivement and not the Diploma itself.......maybe not.

I figure its probably just a case of the new guy striving for some credibility......

Click to expand...

Actually Money Tree, I say this to make people aware that I have to watch my P's and Q's - badge of honour, hahahaha...

No, it means I'm biting my tongue half the time since I really don't want to infringe the regulations, and take great care not to do this. Also, I only note this when I think it’s relevant on a subject I know well. Look at my disclaimer, and assuming you’re qualified too, you know the regulations, so why have you made this sweeping assumption? I don’t see one for you, now why’s that?

Interestingly, it's actually the least of my qualifications... By the way, it is derivatives that I’ve specialised in, so I think you’ve got your wires crossed again.

So, did you get up on the wrong side of the bed or something today, or do you have a personal issue with me. If so, what’s your problem? If not, why the angst?

Oh, yes, you are right about one thing, I am a new guy on this forum... bit of an old hand at everything else though. Put it this way, Money tree, I was born before Kennedy was shot. How about you? Your profile says August 4th 1973. If that’s right, do the math.

Are you happy now? It’s a shame you take anyone to task in this kind of forum who is willing to philanthropically assist newer traders and investors. I really don’t have to do this you know, but I actually get a kick out of helping others. It’s kind of “paying it backwards” for all the people who helped me on the way up. Do you really object to this, or is it my philosophy that has enraged you so much?

I think I deserve an apology, don’t you? Now are you going to be honorable enough to retract your personal affront, or are you set on being discourteous?


Yours in anticipation


Magdoran

Hello Eddie,


You're more than welcome. Hope your friend got her work in on time...

By the way, loved your previous posts on other threads. I tend to agree with your point of view.

All the best.


Regards


Magdoran