Learning Objectives:

  • Understand the types of market price risks faced by corporate clients.

  • Explain the features of risk management products provided by banks.

  • Identify the risks associated with risk management products.

6.1 Types of Market Price Risks

The HKSI Corporate Banking course focuses on “risk management products that can be used to mitigate price risks relating to foreign exchange, interest rate, and commodity exposures” .

The course asks students to “identify the different types of market price risk that corporates must manage” .

Key Risks:

  • Foreign Exchange Risk: The risk of losses from adverse movements in exchange rates.

  • Interest Rate Risk: The risk of losses from adverse movements in interest rates.

  • Commodity Risk: The risk of losses from adverse movements in commodity prices.

6.2 Risk Management Products

The HKSI course covers “the main types of risk management products such as forwards, futures, swaps, and options” .

Forwards: OTC contracts to buy or sell an asset at a set price on a future date, used to lock in exchange rates and hedge future exposures.

Futures: Standardised, exchange-traded forward contracts.

Options: Contracts giving the holder the right, but not the obligation, to buy or sell an asset at a specified price.

Swaps: Agreements to exchange cash flows, often used to swap a fixed rate for a floating rate.

6.3 Managing Risks with Risk Management Products

The HKSI course asks students to “recognize the features of the various risk management products provided by banks to their corporate customers and how these products can be used to manage interest rate and other price risks” .

FX Hedging: Using forwards, futures, options, and swaps to manage foreign exchange exposure.

Interest Rate Hedging: Using interest rate swaps, caps, floors, and collars to manage interest rate exposure.

Commodity Hedging: Using commodity forwards, futures, and swaps to manage commodity price exposure.

6.4 Risks of Risk Management Products

The HKSI course covers “the risks that can arise with these products and how these risks can be managed” .

Key Risks:

  • Counterparty Risk: The risk that the counterparty to a derivative contract defaults.

  • Market Risk: The risk of losses from adverse market movements.

  • Operational Risk: The risk of errors in trade execution, confirmation, and settlement.

  • Legal Risk: The risk of disputes over contract terms and enforceability.

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