Thursday, January 15, 2009

hedging muni long positions

Short muni positions might be similarly hedged, but I feel long muni positions are more common across muni trading desks, so that’s our focus here.

The simplest hedge is a Treasury, followed by Treasury futures (a basket) as the 2nd simplest. If you long a muni bond, you short a treasury, matching dv01.

Q: What if there’s not an exact matching maturity date?
A:  I guess the futures bucketing (Stirt) calc could help traders decide how many futures contracts needed

Q: Why do I need to hedge? What’s the risk in having the long, assuming 0 credit risk?

A: interest rate delta risk. Interest rate can rise, hurting my long market value. By shorting a treasury, i preserve my net market value of long and short

Treasury (futures) is popular because it’s the most liquid hedging instrument.

Q: Why T-futures if there’s treasury? I was told T-futures are similar to treasury in this case.
A: http://finance.zacks.com/guide-hedging-treasury-bond-futures-5786.html I guess cash outlay is smaller with T-fut

How about swaptions? Since a swaption is an option, there’s an insurance premium cost, so some traders avoid it.

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