Managing credit risk in derivatives transactions

To safeguard profitability and offset potential losses caused by interest rate swings, financial managers are turning increasingly to the off-balance-sheet hedging products broadly known as derivatives. Such products include interest rate swaps, swap options, forward rate agreements, caps, floors, a...

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Bibliographic Details
Published inAFP exchange Vol. 13; no. 4; p. 28
Main Author Cheever, Henry J S
Format Magazine Article
LanguageEnglish
Published Bethesda Association for Financial Professionals 01.07.1993
Subjects
Corporate finance
Credit ratings
Credit risk
Derivatives
Financial institutions
Fixed rates
Interest rate risk
Interest rate swaps
Money center banks
Risk exposure
Risk management
United States > US
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Summary:To safeguard profitability and offset potential losses caused by interest rate swings, financial managers are turning increasingly to the off-balance-sheet hedging products broadly known as derivatives. Such products include interest rate swaps, swap options, forward rate agreements, caps, floors, and collars. The security to be gained from minimal counterparty credit risk exacts payment in the form of higher pricing and often shorter permitted maturities. In derivatives no less than in the case of traditional financial instruments, the classic risk-reward ratio is operative. It is generally agreed that players in the derivatives market have to address 3 kinds of credit risk associated with their transactions - position, settlement, and market. Institutions generally measure market-related credit risk in 3 ways: 1. mark-to-market or current replacement cost, 2. worst case, or 3. most likely case.
ISSN:1528-4077