The coming US dollar crisis Message Board

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Strategies & Market Trends : The coming US dollar crisis

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To: Real Man who wrote (4181)	2/11/2008 2:25:26 AM
From: RockyBalboa	Read Replies (1) of 71442

For simple balance sheet / P&L reasons, efficient hedging would require revaluing such assets beforehand. Trading books with liquid market prices are in that regard relatively easy to manage. For less liquid assets, structured notes etc, where market prices dont exist, banks avoid that by classifying them as Level 3 assets. This stuff is valued mostly "mark to model". For the less exotic stuff, pricing can be obtained by getting marks from different market participants. (By doing this banks admit that there is so much liquidity risk that those assets can not really be sold before maturity). So there is to a small extent hedging those assets, but more in terms of risk mitigation strategies which we know from the loan markets. This could involve having a direct claim to conduits holding the trades, pairing of trades, having legalese in place which avoids cherry picking in case of bankruptcies etc. Ultimately every desk who does trades must obey counterparty limits which are more or less sophisticated. At least banks achnowledge that counterparty risk can not be hedged at all. It is part of the business model... A while ago an article concerning Level 3 assets apperared here: bloomberg.com

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