Inverse Interest Rate Risk
Last updated
Last updated
Can you get more than the promised yields on @notionalfinance ?
YES!!
Sometimes, the interest rates can change in your favor and make you more money. 💰
Let me explain how. 👇
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When you enter a trade, you lock in a certain interest rate on your fCash. This is the rate that determines how much interest you will earn on your fCash over time. 📈
But if the interest rate goes down while you are in the trade, your fCash becomes more valuable. 🚀
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Here’s an example to illustrate this point. 📉
Suppose you enter a trade with 100 Cash and 100 fCash at a 5% interest rate. You hold your position for 3 months and then exit at a 4% interest rate.
How much do you think you will make or lose? 🤔
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If you do the math, you will find out that you will make 0.67 Cash in this trade. That’s a positive APY of 6.69%.
Why? Because your fCash is now worth 100.67 Cash, but you only have to pay back 100 Cash.
That’s a good deal, isn’t it? 🙌
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But what if the interest rate goes up instead of down? Does that mean you will lose money? 🤷♂️
Not necessarily. 😊
Remember, we talked about how the exchange rate between fCash and Cash approaches 1:1 as the maturity date gets closer? 📅
Well, that means that if you hold your position until maturity, you will get the promised APY regardless of the interest rate changes. 🔥
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Here’s another example to show you how this works. 📈
Suppose you enter a trade with 100 Cash and 100 fCash at 5% interest rate. You hold your position until maturity and then exit at 7% interest rate.
How much do you think you will make or lose? 🤔
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If you do the math again, you will find out that you will make 0 Cash in this trade. That’s an APY of 5% (including fees).
Nice! 😎
Why?
Because your fCash is now worth exactly 100 Cash, you also have to pay back 100 Cash.
That’s exactly what you signed up for, isn’t it? 👍
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That’s it for this thread. I hope you learned something new today about interest rate risk and how to benefit from it. 💯
If you have any questions or feedback, feel free to drop them in the comments below. 👇
