Banks Lose $836 Million in First Derivatives Loss (Update1) - Bloomberg.com
As I reread this article, it strikes me that the underlyings experiencing the steepest losses were credit, interest rates and equities. Indeed it makes sense
-Credit started it all and as all those credit derivatives became worthless, dramatic losses followed
-Interest rate losses accelerated as money markets froze in the fall. The fed acted, but not enough to change the global picture
- Equities derivatives hedging suffered from the ban on short selling
It occurs to me, particularly on the interest rate and equities derivatives that they were done in by their reliance on dynamic hedging strategies.Had they based their hedging strategies on BICs, those loses would have largely been avoided. Indeed BICs with their contractual pre-agreement features would have forced the execution of the apropriate hedging strategies.
FX which were not affected by these restriction had a field day. What happened to equities is reminescent of what happened to emerging markets fx in 1997-1998.
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