tpMATCH

Hedging

tpMATCH eliminates fixing risk in your mutually offsetting, but date mismatched FRA positions.

Subject to your timing, minimum amount and credit conditions, tpMATCH endeavours to "match-off" your pairs of FRA positions with pairs of positions held by another client or clients in like notional principals for each position of the pair. In doing so, it is unavoidable that some inherent exposure to the yield curve in those FRA positions will be eliminated, and the tpMATCH Hedge facility creates positions for you in "IMM FRAs" (FRAs whose periods match IMM contract periods) that exhibit curve risk closely equivalent to the eliminated risk.

tpMATCH uses hedge ratios based upon numerically solving for the sensitivity of the FRA to underlying rates. For any matched-off FRA, tpMATCH will derive an appropriate IMM FRA hedge by performing a sensitivity analysis of the present value of the change in the FRA rate to a change in the individual IMM FRA rates. This is done by perturbing the individual underlying rates by one basis point and observing the associated present value of the change in the implied rate of the FRA.

This present value of the FRA rate change is translated into a hedge notional in the IMM FRA by dividing it by the unit PV01 of the perturbed IMM FRA. (The sensitivity analysis can also be performed analytically by differentiating the FRA price function).

Given the dynamic nature of hedge ratios, and the variety of different pricing and valuation methodologies it is of course impossible to guarantee to exactly hedge variations in net present value arising from market changes. Experience shows that this method offers a hedge to within an acceptable margin of error against underlying market movements. The method used to derive the amounts required in IMM FRAs to hedge the matched-off FRAs is defined in the appendix.

tpMATCH finally aggregates the resulting positions in each IMM FRA to create a net position in each.

Stub considerations

For matched-off FRA positions in which either or both FRAs' start date is prior to the first IMM contract date there will be an exposure to the "stub rate"; hence a portion of the FRAs' risk is attributable to the "stub" position.

The "stub" positions are aggregated, and at this point the net resulting stub PV01 is allotted to the first IMM FRA, then tpMATCH applies its matching algorithm to your net IMM FRA positions to match out position pairs (to minimise overall curve risk) with clients having the opposite exposures. The goal is to leave you with greatly decreased fixing risk, but with relatively unchanged curve risk.

Hedging Appendix PDF icon download PDF

Contact

tpMATCH
Tullett Prebon plc
155 Bishopsgate
London EC2M 3TQ
Tel: +44 (0) 20 7200 7177
Fax: +44 (0) 20 7200 7176
tpmatch@tullettprebon.com
Tullett Prebon (Singapore) Limited
50 Raffles Place
#39-00 Singapore Land Tower
Singapore 048623
Singapore
Tel: +65 6922 1499