-75-
3. Risk Management
Swaps dealers needed to value financial derivatives to
measure the performance of their financial derivatives trading
operations and to measure and to ascertain how to hedge the
market risks in their portfolios. Traders were responsible for
maintaining the portfolios they managed within various risk
limits. The traders needed to know their exposure to long-term
and short-term interest rate movement positions in order to
assure that they did not take on unacceptable levels of risk.
Swaps dealers such as FNBC used midmarket values for daily
risk management purposes. The purpose of these valuations was to
measure the day-to-day change in the value of the portfolio and
to quantify the impact that particular interest rate movements
would have on the value of the portfolio. These calculations
were used to monitor risk positions (i.e., how much unhedged
market risk a trader could assume) and to identify where hedging
was needed. Swaps dealers such as FNBC did not rely upon their
credit adjustments to risk-manage their swaps and did not use
their administrative costs adjustments for risk management.
4. Management Reporting
Each month, swaps dealers such as FNBC prepared a management
report for the financial derivatives profit center that included
interest rate swaps. The monthly management reports contained a
profit-and-loss statement and a balance sheet. On its balance
Page: Previous 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 NextLast modified: May 25, 2011