Use of derivatives to hedge against risk in a lending context
Use of derivatives to hedge against risk in a lending context

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Use of derivatives to hedge against risk in a lending context
  • Hedging against risk in a lending context
  • Common risks which are hedged against in a lending context
  • The hedging bank
  • Hedging against interest rate risk
  • Hedging against exchange rate risk
  • Hedging against commodity price risk
  • The cost of hedging
  • Corporate Insolvency and Governance Act 2020

Use of derivatives to hedge against risk in a lending context

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The most common reasons for entering into derivatives are for the purposes of:

  1. speculation—where a party wishes to gain exposure to a particular variable, eg, speculating on the future price of a commodity in the belief that it is about to go up or down

  2. hedging—where a party wishes to cover its exposure to the risk of an adverse movement in a variable

  3. arbitrage—where a party wishes to exploit a difference in price (on different markets or on the same market over time) to either make a profit or reduce its costs or where one party has access to a price or market that another party cannot access, or

  4. exposure to asset classes—where a party wishes to gain exposure to a particular market (eg commodities, shares, property) without the costs, complications and formalities associated with those markets

Derivatives are often entered into in connection with lending transactions

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