confirming: long commodity forward also implicitly long interest rate forward, so the proper hedge is short interest rate forward. short commodity forward also implicitly short interest rate forward, so the proper hedge is long interest rate forward.
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huh- CSK - go on…
huh? F = S(1+r)^T. didn’t i buy that “r”
I SCREWED UP!!! 
rand0m you are right, sorry guys, this is it, i think i reached my limit!
if r jumps after i enters into the contract, i am better of cause F is up. if r drops, i lose cause F is down. isn’t it a typical long behavior?
no, it’s the opposite… if r increases your opp cost has increased and you are losing… (as far as i know)
Long, that is a forward you have no opp cost since you put no cash down
opp cost? that’s sth new. then if i bet on commodity but not on interest rate what my hedge should be?
so, are we now confirming Random’s first post that started this thread? i think i’m ready to…but what about other people?
sorry, i confused commodity prepaid swaps with Commodity forwards. I agree with you all…
3rd Long prepaid forward is when you are SHORT the forward - so you are short interest rate
rand0m Wrote: ------------------------------------------------------- > then if i bet on > commodity but not on interest rate what my hedge > should be? If you are betting on commodities to increase (for example swap pay fixed and receive floating) you will be hurt if int. rates go down ( PV of your fixed payments will increase), to hedge the int. rate risk, you need to be paying floating in an int. rate swap ( or short FRA)
mo34. Reading 35, Problem 5. I am looking at it. If you pay fixed and IR goes up you will lose money
I’m sorry. Correct. You’re liable for the fixed payments off-course … so PV would go down if int rates go up. So you want to enter int. rate swap as receive fixed to hedge int. rate exposure.
mo34 Wrote: ------------------------------------------------------- > So you want to enter int. rate swap as receive > fixed to hedge int. rate exposure. i already locked in a fixed int. rate in my commodity contract. why do i need to receive another fixed rate as a hedge? shouldn’t i sell the rate that i locked in?
rand0m, you are correct if IR goes up and you lose money, you should enter into pay fiex and not received fixed.
I hate finding out new things this close to the end but… What we’re all saying is the long in a prepaid commodity swap will lose if interest rates go up. The thinking here is I’m agreeing to prepay for some oil, I’ve implicitly loaned money to Mr. OPEC. But that’s only true if markets are in contango and successive forward prices are higher. If in backwardation, you win when interest rates rise. In this case successive forward rates are smaller so when you go long a prepaid swap you are implicitly BORROWING, not lending.