Day Trading & Forex Forum

MrGecko

do your homework

Options, Futures, and Other Derivatives (Prentice Hall Series in Finance): JOHN C HULL: Amazon.co.uk: Books

Hoggums

Well done for GJ trying to help. Your questions are so vague and demonstrate a complete lack of knowledge it's difficult to know how to help.

Simplistically - a bank will hedge a net position using either the underlying or a derivative. E.g. A very simple hedging server I worked on a while back bought/sold the opposite of the net client FX positions and combined this with simple delta hedging on their FX option positions. (It broke down one day and netted the bank a few hundred thousand - but that's another story).

Derivatives aren't necessarily used for hedging. However a simple example of using an option for hedging would be to buy an out of money put option on a share you own. Thus if the share price crashes your put option provides some insurance (at a premium).

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Hoggums

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Outside of a dog, a book is a man's best friend,
inside of a dog, it's too dark to read. -- G Marx.

A Dashing Blade

Lazy student in "essay due in today" shock horror!

free_money

A Dashing Blade, what is it with the 'judgements' I am asking a question, if you can't answer it then fair enough. But do not come out with stupid assumptions - 'lazy' - NO MATE, 'student' - yes about 7 years ago, 'essay due in today' - what are you on about.

Back to the question, I appreciate the help and I know there is many instruments in hedging and speculation. But what is banks most primary tool in derivatives, when managing risk. The risk could be interest rate, exchange rates. Do they adapt the use of SWAPS, options - calls and puts, forwards/futures.
Do they use continuous time option pricing models?

What are common methods/practices?

Thank you to all, who are willing to help.

gooseman

depends where their risk lies. if their risk is interest rates as a result of an OTC swap they might trade some futures or an option. they can use FRA's, exotics, anything. still too vague.

if tyou want to ask a direct question ask it.

here is a small example-a large corporate calls an i-bank and says I am expecting monthly payments for a loan agreed at x% but i am receiving USD and I am a GBP based compnay. so they have FX and interets rtae risk. they can execute an OTC swap with the bank to receive a fixed rate in GBP and the bank will take on the IR and FX risk from the person paying the corporate. They will have charged a price for this transaction in basis points and they will hedge their risk in the market with a future, or forward, or an option probably on the exchange locking in a profit. Or they may partial hedge it if they have a view on the FX rate or interets rate.

MrGecko

look mate - don't take any offence, but the silliness of the answers you are getting is reflected in the questions you ask.

"when managing risk" is about as useful as a chocolate teapot - it's like saying "which is the best way to fish?" - you mean commercial fishing? deep water? Fresh water? Fly fishing? which type of fish? what do you want to do with them?

better questions will yield better results.

raysor

LOL!! If you don't know the question it is very difficult to get the answer.

The state the banks are in the answer seems like NONE!

arabianights

They hedged the risks they had identified very well

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