LIBOR Exposure/Leverage Calculation

[Radley]

Hi guys

This is my first post, and I am looking forward to tapping the wealth of collective knowledge that you guys have.

I am developing my trading strategy, and I need to know how to calculate my Exposure/Leverage on interest rate futures positions.

For example - my portfolio is $1million. I buy 1 gold future at $40.40 per barrel. The contract is for 1000 barrels. Thus, if Oil prices fall to ZERO, the absolute maximum I can lose is $40 400. This is my exposure to Oil, and thus I can calculate my portfolio leverage as [(Portfolio Exposure)/Portfolio]


If I were to trade 100 Oil futures, my Exposure would be $4'040'000, and thus my Leverage = (4'040'000/1'000'000) = 4.04.


OK. Now, when I trade a LIBOR future, which is quoted at 96.00, and the value of 1 tick is £2500.

If I buy 1 contract, my Exposure is (96 * 2500) = $240 000. This is massive, but basically, rates would have to go to 100% for me to lose everything. Thus, it cannot be right to calculate my leverage using this number as the Exposure? Or is it!?

Thus, if I buy 100 LIBOR futures, my Exposure is $24million! That is 24 times leverage? Surely no broker would give you that amount of leverage? How do they cap it?



And for my Grand Finale...... What is the Exposure if I am SHORT the LIBOR futures!?



Thank you for reading my post, and I would be really grateful if you guys could help me out with some answers to these ...

 

[arabianights]

In theory your exposure is unlimited whether you are long or short! There is nothing stopping negative interest rates or 10000000% interest rates.

In practice I would suggest 50 ticks is a reasonable estimate for a possible loss in a day, although I can think of two 'proper' moves of more than 50 ticks (BOE 1.5% cut and SNB 1% cut) and two 'improper' moves (150 tick fat finger on Eurodollar and 150 tick fat finger on Short Sterling) in the last six months. Alternatively, you can look at the VaR values (what you have to put up as margin) which tend to be about a 25-30 ticks on the outrights.

 

[Radley]

Thanks arabianights

Your reply is much appreciated. However, I am still at a loss then as to how to calculate the amount of Leverage I use? If I have a diversified futures portfolio, with a number of positions, how do I calculate my Leverage? I thought it would be Exposure/Notional, but not sure?

Thanks again

 

[arabianights]

Problem is the notional value of STIRs is so massive that you can't really use it for anything... I mean with my present reasonably small position do I really have anything like the same exposure as someone who really has decided to borrow 84 million swiss francs in March? Unlikely...

 

[MrGecko]

what happened to chatzy?

 

[arabianights]

seems broke today, dunno why