Hi, How does derivative increase available capital by reducing regulatory capital requirement? It is mentioned in Core Reading, Derivatives section of ALM chapter (SA2). Thank you,
Derivatives -> lower risk -> lower required capital [If 'available capital' is defined as assets - liabilities, then agree that this isn't directly impacted in absolute terms; technically reducing required capital increases 'free capital'. However, as is mentioned earlier in that chapter, the strength of a balance sheet, and of the available capital, is often measured as the ratio of available capital to required capital (the 'solvency cover ratio'), and that would increase if required capital reduces.]
