What is the most direct mechanism available to retail investors to profit from (i.e. hedge against) a future increase in the 12-month LIBOR rate?

e.g. The 12-month LIBOR rate is 2.29% as of 2/1/2018. The investor wishes to take on a position which will profit if the 12-month LIBOR rate is higher than 2.29% on February 1st, 2024 (6 years from now), understanding there would likely be a loss if the rate is under 2.29% at that time.

I have reviewed the CME's Interest Rate Swap products (CME link here), however, it appears they do not have a 12-month LIBOR specifically, and besides, their products are only available to institutional and certain high net worth individuals. I'm interested in something available to the general public.

Practical applications: An individual may have a future obligation which is effectively short 12-month LIBOR futures, such as an Adjustable Rate Mortage currently frozen to an initial fixed rate, and wishes to hedge this highly directional exposure.


1 Answer 1


Your basic requirement is exposure to a 12M Libor rate on a specific date. This is directly an FRA (forward rate agreement). But retail investors won't be able to trade those. Indeed the market is not really liquid enough to offer those so readily. Particularly since it is against 12M Libor which is a very poor liquidity tenor.

A very good proxy would be to trade the Mar 24, Jun 24, Sep 24 and Dec 24 STIRS (short term interest rate futures) simultaneously. Trading 4 of them consecutively acquires the necessary 12M tenor period but of course you run the risk of the 3M/12M basis (since STIRS settle against 3M Libor). However, given your choice as a retail investor (and the dealer execution cost of 3M/12M basis) I would consider this a really good proxy for what you actually want to trade. All you need is a futures trading account. This is what I would do to get that exposure.

Note that only really in USD is the STIR market liquid enough to go 6Y into the future, EUR you might get 4Y or 5Y in small size and GBP probably 3Y or 4Y. Then you would have to think about compromising on your timeframe instead and consider rolling futures after a period of time (i.e. running curve risk throughout the life of your trade)


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