Cost of Hedging Update 10-3-13

by Jay Pestrichelli on October 3rd, 2013

After 2 days of a government shut-down, the cost of hedging has remained surprisingly low.  As of the close of business on the 2nd the short-term daily cost was 1.00 basis points per day and the mid-term cost out to March 2014 dropped to 1.10 basis points per day.  
See data for the past 27 months on our Resources Page

Our last update on the cost of hedging was a discussion about the lack of the Fed tapering and how the market was looking ahead to the potential government shut-down. Well, as it turns out, the market had the right call, and when things go as expected, there is little volatility. It has been surprising to us at Buy and Hedge that the market has not showed more signs of fear. Including today, the market is down 9 out of the last 11 days since the Fed news and yet, the VIX is still well below 20.
 
The under-reaction in the price of options has kept the cost of hedging relatively low considering the state of our political predicament. Right now both side seems willing to hold their ground and for the most part, traders just don’t care. However, the approaching October 17th debt ceiling deadline is one that will send investors to the sidelines. Watch for that to be a catalyst for stronger lower stock prices and higher costs of hedging.


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