Market Risk Management: Hedging

Market Risk Management: Hedging

Intuition Publishing
Updated Aug 26, 2020

Banks can retain market risk on their books or mitigate this risk by hedging with derivatives. Hedging may, however, expose the bank to counterparty credit risk if the hedging instrument is traded over the counter. Here we examine the techniques banks use to hedge market risk, how banks determine the optimal hedge, and the interconnection between market risk and other forms of risk.