Chapter 22 - portfolio management

[abumenang]

Hi there

Can someone please clarify a question I have on chapter 22, portfolio management.

I'm abit puzzled as to why is it not stated clearly that swaps are used to hedge risk whereas it is stated clearly under futures and options that they are used to hedge risk.

This point appears under the heading 1.6 inflation swaps in the cmp, that using inflation swaps can hedge market risk.

However, at the beginning of section 1, the acted text clearly states that the 3 main uses of swaps are

1. Risk management - matching assets & liabilities
2. Reducing cost of borrowing
3. Swapping exposure btw different asset classes without disturbing the underlying assets.

My question is how does point 1 relate to hedging or is it a separate point altogether? If so why is it not highlighted in the same way as it is for futures and options?

Thanks.

 

[Colin McKee]

swaps

Hi, I would say that swaps are used for a LARGE number of things nowadays, but these three are still probably contenders for the most important 3 uses. matching assets and liabilities feels to me like it belongs there as it is hedging risk. Swaps are used to synthetically produce long bonds of a certain duration to "hedge" the duration risk in a pension scheme. They are also used to synthetically generate inflation bonds to hedge inflation liabilities. So point 1 sounds OK to me, and hedging is a reasonable description. Hope this helps.