Author Topic: Deflation hedges  (Read 227 times)

kilroy04

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Deflation hedges
« on: Today at 12:07:22 PM »
From the annual shareholders letter:
 
$100 billion notional amount in deflation hedges which still have 2.8 years to go and are now on our balance sheet at only $7 million.


Do you suppose this might yet come into play?  Anyone have access to data on this?


mcliu

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Re: Deflation hedges
« Reply #1 on: Today at 12:30:11 PM »
US CPI Feb: 259
Deflation hedge strike: 231
Duration: 2.7 years

EU CPI: 105
Strike: 96
Duration: 2.2 years

Needs about 10% deflation to break-even. Have to see the #s for March, with O&G down so much, they might get a decent mark, but is there really a market to sell these securities? Maybe there's an early settlement clause?

kilroy04

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Re: Deflation hedges
« Reply #2 on: Today at 02:05:02 PM »
Thanks for posting that mcliu.  With severe recession (or more) and all the needed stimulus, it will be interesting to see what happens.  Even volatility could turn out to be significant with that notional amount.  There could be cds rhymes.  Based on the last 20 years, it would be somewhat unusual for FFH not to have some level of hedging.

StubbleJumper

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Re: Deflation hedges
« Reply #3 on: Today at 02:45:21 PM »
US CPI Feb: 259
Deflation hedge strike: 231
Duration: 2.7 years

EU CPI: 105
Strike: 96
Duration: 2.2 years

Needs about 10% deflation to break-even. Have to see the #s for March, with O&G down so much, they might get a decent mark, but is there really a market to sell these securities? Maybe there's an early settlement clause?


The interesting wild card is the shelter element of CPI.  It's a heavyweight in the index, and is it possible (likely?) that Covid and its associated recession could push US housing prices down considerably?  Otherwise, it's a bit tough to imagine a 10% haircut in the CPI.


SJ