how to develop a hedging strategy for a banking industry

Expert Solution

Banks are exposed to risks of interest rates changing and also currency rates mismatch for their obligations and assets. Thus for banking industry, in order to eliminate these risks, it is essential that they match the duration of their assets and liabilities closely to eliminate any unfunded obligations. This can be done by buying currency forwards or currency future contracts for their overseas loan obligations and these should match the payment obligations for the bank. Also the advances should match the duration of these loans to the extent possible to prevent any timing differences.

Another risk is the change in interest rates. So short term funds should only be used to make short term loans and long term funds to make long term advances with fully hedged currency futures or forwards to eliminate the chance of a variation in obligations. Thus using duration match between assets and liabiities and fully covering the currency risk is the strategy to be followed by banks to hedge their risks.

jeff jeffy answered 1 year ago

how can Disney improve the current hedging strategy?

Compare Porsche’s exchange risk hedging strategy to that of BMW’s hedging strategy? Clearly explain the advantages...

Compare Porsche’s exchange risk hedging strategy to that of BMW’s hedging strategy? Clearly explain the advantages and disadvantages of each strategy.

How has technology changed the banking industry?

what is the difference between a speculative stragety and hedging strategy?

give recommendation on credit risk and the hedging strategy for the banks

Within option trading, is a box spread a hedging strategy, a speculative strategy or something else?...

Within option trading, is a box spread a hedging strategy, a speculative strategy or something else? Thanks

Explain in detail the evolution of the banking industry and how initial practices of their founders...

Explain in detail the evolution of the banking industry and how initial practices of their founders still persist today?

1. Explain in detail the evolution of the banking industry and how initial practices of their...

1. Explain in detail the evolution of the banking industry and how initial practices of their founders still persist today Instructions: Answer the above two questions and make sure that: 1. You use your own words as any plagiarism will be captured by the software and rejected 2. You don’t share your answers with anyone as that might jeopardize your grade 3. You submit on the due as late submissions will not be entertained

Describe in words the hedging strategy that the company should take in each of these cases....

Describe in words the hedging strategy that the company should take in each of these cases. Remember that a possible answer is that the company should not be hedging at all. (1 paragraph maximum for each) a). A US manufacturing firm that produces in the US and sells cars in Europe would like to reduce the effect of currency fluctuations on its profits. b) A CFO believes that the price of oil (one of the company’s main inputs) is going...

Explain what the management needs to consider in the hedging strategy selection process

Question