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 (London Interbank Offered Rate) 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.”

 

Because of the way they are quoted, there’s little risk of loss, because interest rates really don’t go negative, he adds.

 

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