Overhedging and Pricing grid: Difference between pages

Revision as of 16:34, 25 July 2015

A clause in a loan document which links the pricing of the borrowing to the credit rating of the borrower.

Also known as a 'ratchet'.

@@ Line 1: / Line 1: @@
-Overhedging is a form of speculation.
+A clause in a loan document which links the pricing of the borrowing to the credit rating of the borrower.
-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.
+Also known as a 'ratchet'.
-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%.
-For example in this case the size of the new speculative position is 200% - 100% = 100%.
-In other words equal in size to the original exposure being hedged.
-The new speculative position is in the opposite direction to the original exposure.
 == See also ==
-* [[Hedging]]
+* [[Credit rating]]
-* [[Underhedging]]
+* [[Ratings trigger]]
+* [[Rating grid]]
-[[Category:Manage_risks]]
+[[Category:Treasury_operations_infrastructure]]
-[[Category:Manage_risks]]
-[[Category:Manage_risks]]
-[[Category:Risk_frameworks]]