HedgeNordic’s Post

Banks Investing in ETFs Banks can invest in one ETF and get access to 100s of securities without booking trades, interest payments, book yields etc. It's as if they can buy an entire book of securities via one trade and get 20% risk weighting. "Full look-through approach: Used only for equity exposures to a mutual fund or other investment fund. Requires a minimum risk weight of 20 percent. Under this approach, banks calculate the aggregate risk-weighted asset amounts of the carrying value of the exposures held by the fund as if they were held directly by the bank multiplied by the bank’s proportional ownership share of the fund" https://lnkd.in/gm2qW_Qm

Fitch Ratings recently highlighted private credit’s rapid expansion: the market now rivals leveraged loans and high-yield bonds at roughly $1.6 trillion and could reach $2.7 trillion by 2029. With this growth, private credit could become a meaningful channel in the next systemic crisis. The risk is not just about spreads, it will depend on how portfolios are structured and monitored. Tenor, covenants, liquidity windows, and FX exposures are the true transmission channels. And LPs and regulators are asking tougher questions: can you prove your controls are working in real time? At i2 group, we embed these critical success factors into our platform’s architecture- unifying data models to deliver a single source of truth, enabling automated real-time alerts that drive rapid decision-making, and generating comprehensive, audit-ready reporting. 💬 If you could harden only one control before year-end, cash coverage, WAL limits, or covenant cushions, which would it be, and why? 🔗 You can find the link to the full article in the comment section of this post #PrivateCredit #PrivateDebt #CreditMarkets #RiskManagement #i2group

Why the FT Published our letter: "It's wrong to look at FX Hedging as a Cost"   Our CCO Haakon Blakstad outlines the value of currency risk hedging (as seen in Financial Times in the June 2024 edition).   Currency hedging is often seen as a drag on returns. But this misconception overlooks a key reality: hedging currency risk can optimize portfolio performance. - Here's how: When you hedge from a lower-yielding currency to a higher-yielding one, you're not paying for protection, you're being compensated for the interest rate differential. The forward rate becomes more favorable than the spot rate, transforming your hedge from a cost into a value-adding strategy. - The mechanics: Forward rates reflect interest rate differentials between currencies. Without this, arbitrage would be obvious. Because it exists, investors can capture the interest they'd earn by holding the higher-yielding currency. - The real cost? A "hedge-adverse" approach means missed opportunities, overlooked strategies, and uncaptured value. In volatile markets, this gets expensive. - Bottom line: FX hedging isn't just risk mitigation, it's an integral part of portfolio construction that can enhance returns when properly implemented. Read more: https://lnkd.in/dUPHdhNk #FXHedging #CurrencyRisk #RiskManagement

Day 53/187 CFA Level 1 prep journey Derivatives 📌 Derivatives are known for risk management if a buyer of Commodities, he may be scared of price increases so he can go for F+ or C+ if price increases he may have to buy at goods at higher prices but he make gains from this contract. in total he loss is recovered. partial hedge can be done. that increases risk and higher chance of getting more profit. 📌when party enter into future contract the central clearing house break one contract and replacing them 2 different contract which includes 4 parties. this is called Novation. 📌Standardization while clearing and settling the contracts which increases liquidity but customisation is not possible as forwards. Dealer market/ OTC market they trade with end users to generate profit and other dealers to reduce risk ( hedge). it facilitates more liquidity, more transparency and is required to maintain deposit Counter party credit risk reduces. Dealers market is not the same as Formal stock exchange. it is unregulated, less transparency and customizable. No central clearing house like normal exchange, counter party credit risk increases. After the 2008 financial crisis similar to the central clearing house (CCH) has been introduced. As CCH it also replaces a single trade with 2 trades ( includes 4 parties) disclosures have increased. It makes it easier to clear and settle transactions in the dealers market. 📌Options in company balance sheet (replicating options in the balance sheet) We treat equity as a call option and the underlying asset is the value of the company (asset) 📌calculation of payoff for equity (C+) What if the underlying goes below or above the exercise price if the value of firm (underlying asset) goes below the Debt capital ( exercise price) the payoff to equity holders is 0 same as call option. if the value of firm (underlying asset) goes above the Debt capital ( exercise price) the payoff will be whatever the money is left after paying to debt ( exercise price) the profit of equity (call option) determined after deducting their capital ( premium) 📌We treat Debt as B+(investing in bank) and P- ( put option sell). and exercise price or strike price is face value of debt issued. 📌calculation of payoff for Debt (B+,P-) what if the underlying asset goes below the exercise price. the payoff :- B+ is constant and P- starts to fall. ( the loss is measured after deducting a premium amount) If the underlying asset goes above the exercise price. the payoff:- B+ is constant and P- ( the option will lapses he will receive his premium) #CFALEVEL1 #derivatives #options #finance #balancesheet #equity #debt

Shifts in Private Credit The recent interview with PIMCO points to real cracks forming in the direct lending market. Competitive pressures, looser covenants, and tighter liquidity are reshaping a space that was once considered resilient. 👉 Full interview here: https://lnkd.in/e_EqntvP One question this raises: how do investors and lenders manage rising counterparty and default risks as the landscape changes? Credit insurance could play a constructive role by transferring part of that default risk from lenders to insurers, adding another layer of protection in a market showing signs of strain. What do you think—can it be part of the toolkit for private credit risk management?

Financial System Vulnerabilities   The 2021 collapse of Archegos Capital Management underscores critical weaknesses in unregulated shadow banking. Utilizing extreme leverage through total return swaps, Archegos established significant positions in stocks like ViacomCBS and Discovery. The ensuing market volatility led to margin calls and a default, triggering over $20 billion in rapid liquidations and $5.5 billion in losses for Credit Suisse. This incident contributed to the bank's eventual takeover by UBS and raised serious concerns about the interconnectedness and opacity within the shadow banking sector.   Fast forward to 2025, private equity defaults have escalated drastically, with 21 PE-backed companies defaulting on $27 billion of debt, marking an 80% increase from the previous quarter. This surge, attributed to unfavorable economic policies, has prompted warnings from the Bank of England and the IMF regarding the systemic risks posed by the $8 trillion PE industry.   Additionally, hedge funds, central to the $250 trillion shadow banking system, have become a source of fragility in the U.S. Treasury market, leveraging positions extensively. In early 2025, over $1 trillion in leveraged arbitrage positions contributed to volatility in Treasury yields, raising alarms about potential liquidity crises.   Regulatory bodies call for enhanced transparency and risk assessment as shadow banking accounts for nearly half of global financial assets but operates with minimal oversight. The democratization of private investments into retirement funds introduces further risk to retail investors, potentially leading to higher consumer borrowing costs and broader economic implications.   https://lnkd.in/d77CgrvU

The Anatomy of a Crisis: How Financial Innovation Outpaced Risk Management Between 2003-2007, major investment banks created a complex web of financial instruments that would ultimately destabilize the global economy. Understanding this mechanism is crucial for preventing future systemic risks. The Innovation Chain: Banks originated subprime mortgages, then packaged them into Mortgage-Backed Securities (MBS). These MBS were pooled again to create Collateralized Debt Obligations (CDOs). Through "financial engineering," banks could transform $100M of BBB-rated subprime bonds into CDOs where 65% received AAA ratings. The Corporate Incentive Structure: Investment banks earned 1-2% in structuring fees per deal - $10-20M for a $1B CDO. With no residual liability after sale, the incentive favored volume over loan quality. Banks retained "super-senior" tranches, assuming they were risk-free, which generated returns exceeding 30% on minimal capital requirements. Regulatory Arbitrage: Banks used off-balance sheet vehicles (SIVs) to hold these instruments, circumventing capital requirements. The $400B SIV market collapsed when short-term funding dried up, forcing banks to absorb losses they thought they had transferred. The Systemic Failure: When housing prices declined, these instruments proved highly correlated rather than diversified. Banks had "insured" each other through Credit Default Swaps (CDS) totaling $33-47 trillion - creating a domino effect where one failure threatened the entire system. Key Lesson: When fee structures reward transaction volume over long-term value creation, and regulatory frameworks lag financial innovation, systemic risk accumulates invisibly until it becomes catastrophic. The crisis wasn't about individual malfeasance - it was about misaligned incentives embedded in the financial architecture itself. #FinancialCrisis #RiskManagement #Banking #FinancialInnovation #SystemicRisk #FinancialRegulation #InvestmentBanking #CreditRisk

Fitch Ratings warns that while private credit isn’t yet a systemic risk, its rapid growth and complexity could amplify shocks across the financial system. The sector now rivals leveraged loans and high-yield bonds in size, raising calls for greater oversight and transparency. #PrivateCredit Details here: https://lnkd.in/gwRVf6gS

Jamie Dimon said (in the Financial Times article below): "I probably shouldn’t say this but when you see one cockroach there are probably more" - he was, of course, referring to fraud and manipulative behavior in credit markets... ... but the context is broader and speaks about the state of the financial sector with a lot of "unaccounted" leverage financed by firms with private credit (on and off-balance-sheet). I see a lot of opportunities arising from private credit, but the numbers speak to accelerating risks in this sector and known (and likely many unknown) spillover risks to the banking sector. We need more and better data to assess these risks. Ratings are too slow to respond (and most firms remain unrated), market prices are helpful but also these are mainly available for larger firms and, as in the case of First Brands, were still not responding when lenders pulled the refinancing attempt in August '25 (see the timeline of events below). I discuss this more in a talk at the ASC of the European Systemic Risk Board next week. https://lnkd.in/ey7gp-3n #distress #default #FirstBrands #privatecredit #loans #banks #creditlines