The Moorad Choudhry Anthology, + Website

CHAPTER 13Market Risk and Non‐Traded Market Risk (Interest‐Rate Risk in the Banking Book)

“It was clear to me that many Naval Academy graduates and senior officers did whatever it took to please their bosses. Such sycophants taught me one of the most important lessons I learned from my Vietnam experience: there will always be people who pursue power by ingratiating themselves with those in power without pausing to assess the goals of those leaders. I came to understand this as a POW, but I have witnessed it in all institutions since: corporations, bureaucracies, schools, churches, you name it.”

—Robert Wideman, Unexpected Prisoner: Memoir of a Vietnam POW, 2 May 2016

In a discipline that is more art than science, the subset of finance that is “hedging” is often an even more imprecise and approximate art. The Head of Treasury at the UK subsidiary of a European bank was fond of telling the author that “hedging was for gardeners”. That is a perhaps understandable attitude if one is running a “Banking Book”, where assets and liabilities do not re‐mark every day. In a Trading Book environment, hedging is arguably a more precise technique. One of the best examples the author ever observed personally was at NatWest Bank's Global Financial Markets division in 1998; the FX Exotic Options desk, run at the time by a gentleman named Luke Ding, had structured the book so that the P&L was positive whichever direction the underlying FX rate moved. That was impressive, but then again an ...