In House Training - Dealer

Hi hi.. its been a while since i updated this blog. I've been very busy with in house training as a dealer. You probably surprise. Yeah after all this years i avoided to be a dealer, I finally decided to train as dealer. NOt that I want to be a dealer, as you probably know that I have very bad experiences as a commodity dealer in BBJ, I want to learn the science and the knowledge. It turns out that a lot of things in finance that I totally don't understand. Amazing to know what people have done in finance. Big Wow!

First of all, I would like to introduce Interest rate futures. My first thought on IR futures is that you just buy or sell futures on interest rate, and net settle the spread between futures contract and the spot contract. It turns out is not that easy. Its a hedging instruments. You buy a IR futures contract in order to hedge your interest rate exposure. Let say you want to borrow in 3 months and still not knowing what is your rate payment. You hedge them by selling IR futures, that is hedging for IR to go up. If IR go up in 3 months, then you will make money from the IR Futures, while you're locking your IR rate for borrowing. The size of a contract is $1 mio per contract. Isn't that complicated?

I've also noticed that interest rate swap is not that easy. At first, I thought that IRS is just simply exchanging floating rate to a fixed rate. On the other hand, you can definitely make profit by making a second swap. Example, you borrow at LIBOR + 50 bps, and you want to pay them fix. So you hedge it using IRS, by paying, say 6%, and receiving LIBOR, and so in net, you pay fix 6.5%. During the lifetime of the IRS, interest rate goes up say to 8%, and you want to make profit out of it. Therefore, you do second swap with another conterparty, and receiving 8% by paying LIBOR. So at the end, you only pay LIBOR - 150 bps. Nice...

I will update it later... cheers..