Hedge LIBOR Funding Volatility Risk

 
July 2020

 

Trade:

Buy MAR 2021 (EDH1) 99.625/99.500 put spread for 1.0 bp.
Strike prices = 0.375 3M LIBOR Long Leg/0.50 3M LIBOR Short Leg
Cost is $25 per spread

Logic:

If banks or funding markets become dislocated again before March of 2021,
3M LIBOR/3M T-BILL spread should blow out (red line on chart below).

Coverage:

11.5:1 max return at terminal value/expiration

How many put spreads do you need?  $25 x 11.5 per one spread = $287.50 max payout

If one needs to cover $2.875mm: 10,000 spreads or $250k in premium outlay

libor funding vol risk

The Fixed Income Group
A Division of RJ O’Brien
fig@rjobrien.com
800.367.3349

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