Hedge LIBOR Funding Volatility Risk
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
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).
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
The Fixed Income Group
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