(Difference between pages)
imported>Doug Williamson |
imported>Doug Williamson |
| Line 1: |
Line 1: |
| 1. ''Hedging''. | | 1. |
|
| |
|
| Basis risk includes the risk of an unfavourable change in the relationship between the price of a derivative and the market value of an underlying asset or liability being hedged.
| | To legally separate particular assets or liabilities within a company or other organisation. |
|
| |
|
| For example resulting in a smaller profit being enjoyed on a hedging derivative, than the loss suffered on the underlying exposure. | | For example, to shield particular assets from the claims of the creditors of the non-ring fenced part of the entity. |
|
| |
|
| Good hedge design therefore seeks to eliminate or minimise basis risk in the hedged position, so far as practicable.
| |
|
| |
|
| | 2. |
|
| |
|
| 2. ''Funding''.
| | The legal barrier created for this purpose. |
|
| |
|
| Basis risk also arises in bank funding.
| |
|
| |
|
| It arises when the reference rates used for the pricing of assets and their funding are different.
| | Sometimes written "ringfence". |
|
| |
|
|
| |
|
| For example, a UK bank's mortgage assets might be priced by reference to BBR (the Bank of England's Official Bank Rate) plus a margin, while the bank's funding is priced at SONIA (plus a margin).
| | ==Other links== |
| | | [http://www.treasurers.org/node/9021 Electric shock, The Treasurer, May 2013] |
| The bank's net interest income depends on the differential between BBR and SONIA.
| |
| | |
| | |
| Basis risk - in this context - means the risk of adverse changes in the differential between BBR and SONIA. An adverse change might compress the bank's net interest income, or even result in losses.
| |
| | |
| | |
| == See also == | |
| * [[Basis]]
| |
| * [[Hedge effectiveness]]
| |
| * [[Hedging]]
| |
| * [[Interest Rate Risk in the Banking Book]] (IRRBB)
| |
| * [[Official Bank Rate]]
| |
| * [[Reference rate]]
| |
| * [[SONIA]]
| |
| | |
| [[Category:Financial_risk_management]] | |
Revision as of 13:57, 2 October 2013
1.
To legally separate particular assets or liabilities within a company or other organisation.
For example, to shield particular assets from the claims of the creditors of the non-ring fenced part of the entity.
2.
The legal barrier created for this purpose.
Sometimes written "ringfence".
Other links
Electric shock, The Treasurer, May 2013
