going long Libor .. means@@

  • If you are long an instrument, you are longing for it to rise. Your delta is positive i.e. in your favor.
  • If you are short an asset, you have a shortage for it and hope it depreciates. Your delta is negative.

… That’s my new “cheat-sheet”. Now let’s compare important derivatives:

  1. I think the meaning of “long eurodollar futures” is non-intuitive. If I long eurodollar futures, I want the expiration-date Libor number to Drop. Suppose today is a week before expiration and today’s Libor is 222 bps, I would long for the rate to Drop to 180 on my expiration date. That would mean my futures’ final price would be 98.2
    1. If you are long the futures, then I guess you are a fixed-rate lender
  2. FRA — you buy the FRA (go long) by agreeing to pay the fixed rate. You want the fixed rate (loan-start-date Libor rate) to rise.
    1. if you buy a FRA then you are a fixed-rate borrower
  3. IRS — fixed-payer is long a swap. As illustrated in earlier posts, the “oranges” to be delivered to you is the stream of floating interest payments

Q: Look at any financial instrument with a fluctuating price. An instrument not necessarily transferable or tradable, but always bettable. What does it mean if I “long” this instrument?
– i pay a fixed price for it, today or predefined dates. No runaway — i must pay.
– i get the right to demand cash flow from this instrument
– I long this instrument because I benefit from appreciation.

This complicated explanation is needed in the Libor and IRS context.

Simplest example — if I long IBM, i buy the stock and stand to gain if it rises.
Simple example — if I long copper, i buy a copper futures contract at $800 ie I pay this price today, and hope the price at contract expiration is higher.
example — if I long 10-year T bond, i buy a futures contract at $101….

In Libor IRS, I’d say every fixed-payer is long Libor. Let me repeat —

* Fixed rate payer is long Libor.
* You BUY a swap if you are long Libor. [1]
* you buy a swap if you are short the bond-market [2]

[2] because you want bond prices to drop and yield to rise along with Libor.

[1] because the fixed rate agreed today is based on current Libor. If I go long on Libor, say, the 90-day eurodollar deposit rate, then I enter IR swap
– I pay a fixed rate of 222 bps/year — ie the “price”, computed at current Libor
– I receive a yet-unknown floating rate, hopefully above 222 bps
– I am long Libor therefore I stand to gain when Libor rises


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