Hey Guys, this is going to sound like an icredibly stupid question…but here it goes cause it’s peaked my curiosity. Ok. So here in Canada you can borrow money at prime if it is for your RSP (401-k). Prime which is variable is now 2.25% You can get a 5 year GIC at 3.25% Now, I know that if rates stay that way…you are earning an arbitrage profit…So how do you lock it in anyway assuming that variable rate will rise past 3.25% in the future??? I can’t seem to figure it out.
I kept running around in a logic circle…I was thinking…if you could pay off the loan the next day, then you dont’ have to worry about rates going up…but you effectively gave back the money you borrowed…plus a day of interest…so why borrow in the first place…someone help put me in place…
Paying off the loan the next day is chickening out of the trade. You won’t make any money. To arbitrage, enter into a vanilla swap with the OTC desk of your local bank, where you receive variable rates and pay fixed.
Level 2 guy Wrote: ------------------------------------------------------- > Paying off the loan the next day is chickening out > of the trade. You won’t make any money. > > To arbitrage, enter into a vanilla swap with the > OTC desk of your local bank, where you receive > variable rates and pay fixed. lmao.
Use the proceeds of the loan to buy a floating rate bond that has similar rate adjustment features with a discount margin at least equal to the spread on your loan. In this case you have marginal basis risk and credit risk.
buy an inverse floater that is as close as possible to thenGIC?