Overhedging and RFR: Difference between pages

Revision as of 12:29, 24 March 2019

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'.

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-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 abbreviation 'RFR' usually refers to risk-free benchmark interest rates, such as SONIA.
-The effect of overhedging in this way is to create a new purely speculative position in the derivative instrument.
+Also known as ''near'' risk-free rates, recognising that such rates are never entirely risk-free.
-The size of the new speculative position is equal to the excess of the principal amount hedged, over 100%.
+Theoretically risk free rates of ''investment'' return, for example in the Capital asset pricing model, are more often designated by 'Rf' or 'rf'.
-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.
+==See also==
+*[[Capital asset pricing model]]
+*[[O/N]]
+*[[RFR WG]]
+*[[Risk-free rate of return]]
+*[[Risk-free rates]]
+*[[SONIA]]
-The new speculative position is in the opposite direction to the original exposure.
+[[Category:Corporate_financial_management]]
+[[Category:Financial_products_and_markets]]
-== See also ==
-* [[Hedging]]
-* [[Underhedging]]