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SARON hedging strategies

Hedging of SARON exposure, Part II

On 5 March 2021, the Financial Conduct Authority (FCA) announced the official dates of the cessation and loss of representativeness of the LIBOR rates. As a result, 31 December 2021 will be the last day on which the CHF LIBOR will be published. During the last months, a multitude of informative documents were provided by the Alternative Reference Rates Committee (ARRC) and the International Swaps and Derivatives Association (ISDA). As a follow-up from the previous article Hedging of SARON exposure, Part I: Explanatory power of SARON term and actual rates, this article assesses the different compounding methodologies with respect to hedging strategy.

IBOR transition: fallback solutions in illiquid markets

At the end of this year, the LIBOR we currently know will be discontinued. For some currencies, the calculation methodology will be adjusted, while others will move to a brand new or alternative risk-free rate (RFR). This also holds for the dollar LIBOR, which will be replaced by the Secured Overnight Financing Rate (SOFR). However, some currencies use the USD LIBOR as a basis for their current reference rates, mainly due to liquidity concerns. Therefore, these FX implied rates face an additional challenge.

Machine learning in risk management

Machine learning (ML) models have already been around for decades. The exponential growth in computing power and data availability, however, has resulted in many new opportunities for ML models. One possible application is to use them in financial institutions’ risk management. This article gives a brief introduction of ML models, followed by the most promising opportunities for using ML models in financial risk management.

White paper ‘The curse of the UFR-drag’

Roll risk management for pension funds

For the valuation of pension liabilities, pension funds in the Netherlands use the so-called interest rate term structure (IRTS) with the ultimate forward rate (UFR) curve. This curve basically allows pension funds to apply a higher rate to value their liabilities – the UFR is currently at 1.9% – than interest rates observed in financial markets. Now pension funds are suffering from the so-called UFR-drag.

The curse of the UFR-drag

Roll risk management for pension funds

For the valuation of pension liabilities, pension funds in the Netherlands use the so-called interest rate term structure (IRTS) with the ultimate forward rate (UFR). This curve basically allows pension funds to apply a higher rate to value their liabilities – the UFR is currently at 1.9% – than interest rates observed in financial markets. Now pension funds are suffering from the so-called UFR-drag.