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elearning > Basis risk

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Learn about the following:

What basis risk is. How basis risk can affect you. How basis risk can be measured. How basis risk can be hedged. The problems with basis swaps.

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Course Summary

Basis risk menuBasis risk what it isBasis risk in the balance sheet

Basis risk measuredBasis risk measuredManaging basis risk

  • 30 minutes
  • 8 question multiple choice test
  • What basis risk is
  • How basis risk can affect you
  • How basis risk can be measured
  • How basis risk can be hedged
  • The problem with basis swaps

Basis Risk - the details

1. What basis risk is

  • How retail financial institutions incur basis risk
  • Example, Libor-Bank rate mismatch
  • The implications of a mismatch
  • How this can lead to gains and losses
  • The “normal” situation
  • What happened in 2007-8
  • How this can lead to large windfall gains or losses
  • Affect on customers and administered rates

2. Measuring basis risk

  • Basis mismatch reporting
  • Example of a simple report
  • Categories of interest rate
  • Net exposures
  • What this tells you about your risk
  • Quantification with a basis point value
  • Strengths & weaknesses

3. Managing basis risk

  • Natural hedges
  • Basis swaps
  • Difficulties with basis swaps
  • Mark-to-market
  • Market liquidity

4. Summary

5. Test

Related Documents

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16th March 2011

Basis risk - an update It's a salutary fact that the regulator has identified that firms that run relatively large basis risks are more prone to margin compression. That's because excessive basis risk reduces your control over the balance sheet and calls into question your risk management and governance. Ask a trader about basis risk and they will tell you it is to do with ineffective hedging. You may think of it as the risk between Libor and Bank rate. The fact is basis risk means different things to different people. So let's define it. In the following article basis risk is "the degree of control you have over the margins in your balance sheet". This may seem an unusual definition but all will become apparent.

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Gap reports show you the interest rate risk you are running in your balance sheet. They put the assets and liabilities into time buckets in accordance with their interest rate repricing. From this simple approach you can obtain a table or graph of the risk being run. This normally includes a profit and loss figure that results from moving the yield curve. Gap limits are also applied in order to keep the interest rate exposure within risk tolerence. Gap reports aren't new; they are widely used and have both strengths and weaknesses. Let's find out more.

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Basis risk occurs when you pay one interest index and receive another. The following looks at just one aspect of a particular type of basis risk. The reference currency is GBP. Similar issues occur for retail institutions whose base currency is EUR or USD.

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