Hedge Your Operating Loans

July 8, 2009 07:00 PM

Linda Smith, Top Producer Executive Editor
Everywhere we turn, we hear of impending inflation and rising interest rates. If you borrow $1 million or more for operating credit, you may want to consider hedging interest rates using Eurodollar futures.
These are tied to the Libor rates—which what banks use in setting interest rates, they are not currency related, says Nate Smith at Jerry Gulke's Strategic Marketing Services. They are the single largest traded futures contract in the world, so they are very liquid; they are offered 10 years out; they protect $1 million in credit for three months. Initial margin is about $1,150.
"Say you want to protect the interest on a $1 million line of credit in 2011,” says Smith. "We would sell one March, one June, one September and one December contract.” Only need the money for a shorter period? You could drop
Because of the way they are quoted, there's little risk of loss, because interest rates really don't go negative, he adds.

You can e-mail Linda Smith at lsmith@farmjournal.com.

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