Microsoft PowerPoint - PoF.ppt

Problemsƒ 147

Banks try to minimize the credit risk/default risk by

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only dealing with well-known banks or

corporations which have excellent

reputation, “the club”

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discouraging speculative positions

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credit limits or margin requirements

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issuing short-term contracts only (f

irms which want to hedge long-term

positions must roll-over short-term contracts, but a rolled-over forward contract is an imperfect substitute for a long-term contract)

Derivative securities: Forwards - Problems