Overhedging and RFR: Difference between pages

From ACT Wiki
(Difference between pages)
Jump to navigationJump to search
imported>SarahB
m (completed definition from Glossary; added See Also)
 
imported>Doug Williamson
(Recognise that RFRs are not entirely risk-free.)
 
Line 1: Line 1:
"'''Overhedging'''" is a form of speculation.
Risk-Free Rate.


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. The effect of overhedging in this way is to create a new purely speculative position in the derivative instrument.
The abbreviation 'RFR' usually refers to risk-free benchmark interest rates, such as SONIA.


The size of the new speculative position is equal to the excess of the principal amount hedged, over 100%.
Also known as ''near'' risk-free rates, recognising that such rates are never entirely risk-free.




For example in this case the size of the new speculative position is 200% - 100% = 100%.
Theoretically risk free rates of ''investment'' return, for example in the Capital asset pricing model, are more often designated by 'Rf' or 'rf'.
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==
*[[Capital asset pricing model]]
*[[RFR WG]]
*[[Risk-free rate of return]]
*[[Risk-free rates]]
*[[SONIA]]


 
[[Category:Corporate_financial_management]]
== See also ==
[[Category:Financial_products_and_markets]]
* [[Hedging]]
* [[Underhedging]]

Revision as of 18:33, 1 December 2018

Risk-Free Rate.

The abbreviation 'RFR' usually refers to risk-free benchmark interest rates, such as SONIA.

Also known as near risk-free rates, recognising that such rates are never entirely risk-free.


Theoretically risk free rates of investment return, for example in the Capital asset pricing model, are more often designated by 'Rf' or 'rf'.


See also