Overhedging and PLAC: Difference between pages

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Overhedging is a form of speculation.
Primary Loss Absorbing Capital.


It means intentionally hedging an amount GREATER THAN the total related risk exposure, for example by the use of a derivative instrument with a principal amount of 200% of the related risk exposure.  
Used, especially in the UK, to refer to equity and bail-in-able long term debt of banks that can be written down in case of financial distress. It includes both equity and bail-in-able long-term debt.


The effect of overhedging in this way is to create a new purely speculative position in the derivative instrument.


The size of the new speculative position is equal to the excess of the principal amount hedged, over 100%.
== See also ==


*[[Capital adequacy]]


For example in this case the size of the new speculative position is 200% - 100% = 100%.
*[[SLAC]] - Secondary Loss Absorbing Capital


In other words equal in size to the original exposure being hedged.
*[[GCLAC]] also referred to as GLAC - gone-concern loss absorbing capital
 
The new speculative position is in the opposite direction to the original exposure.
 
 
== See also ==
* [[Hedging]]
* [[Underhedging]]
* [[MCT]]


[[Category:Manage_risks]]
[[Category:Regulation_and_Law]]
[[Category:Risk_frameworks]]

Revision as of 12:01, 24 March 2014

Primary Loss Absorbing Capital.

Used, especially in the UK, to refer to equity and bail-in-able long term debt of banks that can be written down in case of financial distress. It includes both equity and bail-in-able long-term debt.


See also

  • SLAC - Secondary Loss Absorbing Capital
  • GCLAC also referred to as GLAC - gone-concern loss absorbing capital
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