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Finance Allah Shmoop What are interest rate options All right

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people you may need a big loan in three years

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It's all about the storms And the big sees you

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know with the amount of destruction they'll do to the

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oil rigs you manage out there right you big oil

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company Global warming has in fact changed weather patterns So

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you have no idea if you'll actually need five billion

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dollars in debt to buy and or build a new

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one But today you mister or missus or Miss CEO

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today interest rates are cheap The Fed is almost giving

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away money in two and a half percent interest which

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means that you can get a loan at Summit for

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ish percent interest rate since so much money is involved

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here like five billion dollars Well the move of one

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percent or one hundred basis points is big and times

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were good now and well you really want certainty So

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in order to reduce risk you buy an interest rate

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option that is You pay one hundred million dollars for

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the right three years from now too Then get alone

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of call it three billion dollars and note that you

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don't have to get the full five billion dollars if

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rates go up in the last two billion is expensive

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money while fen you figure inflation has hit big time

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and you can just well raise prices on oil and

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you know or your services to the big oil Cos

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right because that's what you do for a living That

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hundred million dollars is a call option on future interest

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rates that well may or may not be there right

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Like it might expire worthless Or it might be worth

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a fortune if rates or seven eight nine percent So

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what happens if the Fed doesn't budge and rates are

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identical in three years Toe what they are today you

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lose it All right You lose all hundred million dollars

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for that call option You bought Goldman Sachs or Morgan

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Stanley or whatever Big Bank took the risk on the

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other end of that trade Just made one hundred very

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large just for you know being there But you don't

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feel bad about it Why Well because interest rates are

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still then super cheap At four percent it's kind of

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like term life insurance only for the finance world Piccoli

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for big oil companies or big capital expense kind of

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cos every month that goes by and you lose the

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fifty eight bucks you spent on that million dollar policy

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you personally bought for your wife and kids If you

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get hit by a bus well you feel good to

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have wasted that fifty eight dollars because well the alternative

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is you know that you don't have a life You

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know we don't just mean that Then your social calendar's

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empty And your best friends are your Star Wars action 00:02:26.92 --> [endTime] figures no

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