Module 5 · Chapter 14

The Wider Room

A bank that sells a hedge passes its risk on. This chapter shows where a company's hedge sits in the market, which rules touch it, and how to read a new derivative.

≈ 14 min read 8-question test

In this chapter

  • How a bank passes on the risk of the swap it sold
  • Which rules touched Atlas's hedge, and why none required collateral
  • Six questions that open any derivative you have not met before

14.1Dealers and end-users in one paragraph

Atlas is an end-user: it hedged a loan it really owed, with two trades. Pellhaven is a dealer, which quotes prices all day and holds hundreds of trades. A dealer wants to earn the gap between its buying and selling prices, not to bet on interest rates. So when it sells a swap, it passes the rate risk on almost at once.

Key point

A bank that sells you a swap has a mirror trade behind it. That explains its price, its collateral calls and its costs when a trade ends early.

Also in this chapter

  1. How the bank passed its risk on
  2. Who can transfer the swap
  3. Clearing: from a web to a hub
  4. Why Atlas cleared nothing
  5. The four rules that touched this file
  6. Confirming each trade in time
  7. Checking statements and settling disputes
  8. Collateral that was negotiated, not required
  9. Standard forms, netting opinions and resolution stays
  10. The other derivative families
  11. Six questions for any term sheet
  12. Your job

Preview

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