Double Blind

I have just put a trade on a futures contract that will be on the fed funds futures rate in November 2010 and December 2010. If the average fed funds rate in November 2010 is lower than 1.25%, I will lose money. If it is greater than 1.25% then I will gain money. The rate is $4167 per percentage point.

Likewise, I have done the same thing for December 2010; except the interest rate I am betting on is 1.26%.

I am making a few assumptions in the hopes that this trade will be profitable.

First assumption is that the economy will make a visible recovery by the end of 2009. This will put upward pressure on inflation and interest rates will have to rise to compensate. The feds will raise interest rates by a quarter point in every fed meeting and will not stop until inflation has been stopped.

Second assumption is that (nominal) interest rates cannot go below zero percent (otherwise the federal reserve would be paying people to borrow money from them). This caps my loss at $10,459 in the event that interest rates do go to zero and stay there. Interest rates for March 2009 was 0.185%.

My guess is that interest rates by the end of 2010 will be somewhere around 3-4%.

This is also my personal hedge against inflation. I did some math and calculated that doing this was going to be better than purchasing gold, with far less risk.

This entry was posted on Tuesday, March 31st, 2009 and is filed under Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.