Bank One Corporation - Page 209

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          requirement, or a certain credit rating which, unless met, would            
          trigger an early termination of the contract or the posting of              
          collateral in support of the counterparty’s obligations under the           
          contract.  Dealers during the relevant years generally did not              
          adjust interest rates to account for credit risk, nor did they              
          quote different bid and ask rates on the basis of credit rating.            
                    3.  Techniques Used To Minimize Market Risk                       
               The market risk of interest rate swaps arose from the high             
          level of volatility in the value of interest rate swaps.  A small           
          movement in interest rates, for example, could have a large                 
          impact on the value of an interest rate swap.  Swaps dealers                
          attempted to reduce or eliminate market risk by hedging their               
          portfolios so that a portfolio’s value would not change                     
          significantly with either a rise or fall in interest rates.                 
               In the early days of the swaps market, dealers employed                
          simple hedging strategies.  Transactions designed to meet a                 
          customer’s requirements were immediately hedged by entering into            
          an offsetting transaction, such as a matched swap.  In the later            
          years, many dealers (including FNBC) adopted more sophisticated             
          portfolio strategies for hedging market risks.  Under this                  
          approach, all of the dealer’s transactions were broken down into            
          their component cashflows to yield a measure of the net                     
          (residual) market exposures arising from all of the dealer’s                
          positions.  The residual market exposures were then hedged in               






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Last modified: May 25, 2011