For example, our investment portfolio includes publicly traded large-cap and small-cap domestic stocks and global bonds. Our bonds are denominated in various currencies and have both fixed and floating rates. We use over-the-counter derivatives to hedge risks related to interest rates, foreign currency, adverse security price movements, and payment default.
How is the above person not subject to credit risk? The entire portfolio is hedged with derivatives. I think the liquidity risk of his small cap exposure is the least of his worries.
You can’t purchase enough CDS to cover your credit risk. Because when you enter a CDS to offset one counterparty you just exposed yourself to credit risk to a new counter party. It is a bit of a never ending cycle.
Not to mention the entire portfolio is chock-full of derivatives. I guess mixing real life to curriculum. Any who…
