Volume 3 (17) Number 4 pp. 47-54
Udo Broll1, Xu Guo2, Peter Welze3
2. School of Stastitics, Beijing Normal University, Beijing, China
3. Universität Augsburg, Germany.
Risk sharing markets and hedging a loan portfolio: a note
Our study features a financial institute facing credit risk. Hedging credit risk by offsetting an open position with an opposite one in the financial market is important for financial intermediaries, which are concerned with both the profitability and risk of their operations. As risk management is crucial for the financial institute, the issues of how it is optimally determined and how it adjusts to changes in the financial environment deserve closer scrutiny. We extend the analysis of hedging with financial instruments against credit risk to the case of multiple types of credit risk. We show that standard results on the optimal hedge ratio and risk management effectiveness in the case of one single source of credit risk to carry over a loan portfolio in a non-trivial but intuitive way. While we focus on credit risk and credit derivatives, our analysis can be easily applied to other financial assets, which can be traded in futures market.
Keywords: risk management, credit risk, loan portfolio, derivatives, hedging effectiveness.
|MLA||Broll, Udo, et al. "Risk sharing markets and hedging a loan portfolio: a note." Economics and Business Review EBR 17.4 (2017): 47-54. DOI: 10.18559/ebr.2017.4.3|
|APA||Broll, U., Guo, X., & Welze, P. (2017). Risk sharing markets and hedging a loan portfolio: a note. Economics and Business Review EBR 17(4), 47-54 DOI: 10.18559/ebr.2017.4.3|
|ISO 690||BROLL, Udo, GUO, Xu, WELZE, Peter. Risk sharing markets and hedging a loan portfolio: a note. Economics and Business Review EBR, 2017, 17.4: 47-54. DOI: 10.18559/ebr.2017.4.3|