Modelling the Nature of Close-out Netting on Bank Portfolios; .: An Analysis of how Financial Institutions can Minimize their FX Exposures via ... their Interbank Lending and Derivative Deals - Softcover

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The stochastic volatility of daily foreign exchange(FX) derivatives poses a number of risks for theinternational banking community. Settlement risk,liquidity risk and capital adequacy are just a fewimmediate concerns that arise from such volatility.This book examines the impact of close-out nettingon minimising the stochastic volatility of inter-bank FX derivatives. The problem with close-outnetting is that although it is a simple formula oftaking the differences between two banks at onepoint in time, it is the stochastic and volatilenature of FX rates that makes measuring the fullimpact of netting difficult. Through Monte Carlosimulation of the resulting fitted GARCH models, wegenerate the distributions -with and without close-out netting. The findings of this book areinteresting, showing that close-out netting is farmore than just a simple mathematical process.Netting surely does reduce each bank's exposure toFX volatility, however, its multivariate naturereveals some important results for banking riskresearch and indeed many financial analysts.

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