Hedging Mortgage With Options

[tommog]

Just wondering if this is possible, well im pretty sure it is, but anyone seriously considered doing it?

Assume the current scenario (not me I might add). You have a tracker mortgage on a house worth 500k currently you are paying 5%. You fear interest rate hikes are incoming so buy a 5% call, assume this costs you 1% (this is just a guess i dont know what they are priced at) you have now hedged your mortgage at 6%. If interest rates drop by 1% ok you are breaking even, but anymore than 1% and you are still benefitting from a drop in rates. And protected against any rate above 6%.

Or enter a swap aggreement that means you pay £2500 a month as opposed to the £2083 but protected against anything above that.

I think if there are serious hikes coming a lot of home owners just currently managing to pay their mortgages are going to be seriously squeezed

 

[Martinghoul]

Yes, this would make sense, but banks don't offer these sorts of things to their customers. The only thing that sorta comes close is mtge insurance.

 

[xx765]

The idea is right but practically it`s pretty hard to do.

trackers normal track the benchmark rate while options are normally on bonds or bond futures. bond yield moves with benchmark rate but not in 100% correlation so the hedge is not perfect although probably good enough. a bigger issue is options on bond futures are only actively traded in expiries less than 12 months into the future in Europe. With Treasuries it could be better but not by a lot, which means if you have a 25 yr mortgage you have to trade 1-yr options ( already pretty illiquid) and roll over 25 times. A lot of trading to do.

Easier to long so called risky assets or any inflation sensitive assets to get some sort of long interest rate exposure

 

[6am]

Or you could just get a fixed rate mortgage. Problem solved.

 

[Martinghoul]

The original question was about a UK mtge and there are definitely no options on gilts. Options on govt bonds would be the right solution, but you'd have to roll, indeed.

 

[xx765]

The original question was about a UK mtge and there are definitely no options on gilts. Options on govt bonds would be the right solution, but you'd have to roll, indeed.

There are. Options on gilts futures are traded on Liffe.

 

[aryanaa]

Most hedge funds that get involved in mortgages claim that they are doing better and more effective jobs than lenders and investors. Hedge funds are not always all about huge interest rates. At time, they also modify mortgages to that borrowers can easily afford regaining ownership.The truth is, hedge funds are comparatively easier to deal with than mortgage lenders and banks. That may be because such transactions are not the focus of hedge funds. Usually, such loans are not as big and as significant as the usual transactions handled and covered by hedge funds. The businesses are also almost always open to having special and compromising agreements with the borrower. Some borrowers prefer if their mortgage will be turned over and transferred to hedge funds.

 

[Martinghoul]

There are. Options on gilts futures are traded on Liffe.

Sure, you should believe everything LIFFE tells you... They'd love it if options on gilts actually traded, but this just isn't the case. To be more specific, current open interest across all expiries/strikes/underlying contracts is all of 400 lots. So, to reiterate my point, there aren't really options on gilts.

 

[arabianights]

I'll write you some, big boy

 

[Martinghoul]

I'll write you some, big boy

Now we talking... You're on, Mr Liquidity Provider!

 

[DashRiprock]

I will dime arabians bid

 

[arabianights]

I will dime arabians bid

you lifted my offer

 

[DashRiprock]

yes originally I said dime your offer then I changed it to bid and now Ive lifted and totally confused.

Well I think I actually own one of these options now so the only thing to do is to make it an iron condor.

 

[Martinghoul]

yes originally I said dime your offer then I changed it to bid and now Ive lifted and totally confused.

Well I think I actually own one of these options now so the only thing to do is to make it an iron condor.

Yep, 'cause, as all men know, if you do iron condors, you can't lose money.

 

[arabianights]

yes originally I said dime your offer then I changed it to bid and now Ive lifted and totally confused.

Well I think I actually own one of these options now so the only thing to do is to make it an iron condor.

you dimed my bid, dimed my offer and so gave me juice, I'm THAT tight

 

[DashRiprock]

Yep, 'cause, as all men know, if you do iron condors, you can't lose money.

its alright martinghoul I have lots of exit strategies here:

* keep buying until arabian pukes
* do shady dealings with arabian and share the rebates
* learn about probabilities and do iron condors
* run a course on hedging mortgage exposures

so no drama im cool as a cucumber

 

[arabianights]

its alright martinghoul I have lots of exit strategies here:

* keep buying until arabian pukes
* do shady dealings with arabian and share the rebates
* learn about probabilities and do iron condors
* run a course on hedging mortgage exposures

so no drama im cool as a cucumber

how can you buy till I puke? We're flat bitch.

I'm super tight. You dimed my bid and my offer, and since I'm such a big boy and my quotes are super tight, when you dimed my bid in yer puny size you hit my offer and vice versa.

juice is mine. gamma, theta, and match.

 

[DashRiprock]

how can you buy till I puke? We're flat bitch.

I'm super tight. You dimed my bid and my offer, and since I'm such a big boy and my quotes are super tight, when you dimed my bid in yer puny size you hit my offer and vice versa.

juice is mine. gamma, theta, and match.

well tbh i didnt consider that you were 1 tick wide so basically yes im ****flapped.

share the rebates?

 

[arabianights]

gaw on then

 

[TheBramble]

When you've all finished playing with each others willies, can one of you post the ind?

I've got a short AUDJPY that refuses to lie down. Cheers.








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