Using derivatives for hedging
Perhaps the biggest revelation of the current approach towards
counterparty risk management is the paucity of sell-side firms that
actively hedge counterparty risk through derivatives. For most
banks, using derivatives to lay off market risk is a part of their daily
risk management activity, but it seems that it is only the top-tier
institutions that actively use derivatives to hedge counterparty risk.
One market participant says: “Only the top-tier banks currently
dynamically hedge their counterparty risk. Smaller banks from Australia
and Canada, for example, have been looking at our model
but not many others do this as yet.”
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