ERM Frameworks and Responses to risk [82]

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Bullet points include: Hedging (direct buying or selling of offsetting risk exposures) and/or reinsuring them is the most direct way of eliminating individual risks May be a lack of available instruments And/or basis risk between the value of the risk exposure and the value of the hedge for those that are actively traded May become very costly if bid-ask spreads widen E.g. hedging bespoke synthetic CDO books built up prior to the crisis required large (non-index) CDS trades that were difficult to execute Hedge parameters inherently less reliable to determine than valuations, see e.g. Kemp (2009)

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