Another you wont make money this way understand the market type scosey question.

trying to get my head around something here so anyone who can be bothered, please consider the following hypothetical.

You work for a bank and a new client who is trying to expand their overseas operations call you to place an money market hedge to lock in what they believe to be a favourable rate for their projects.
The client trades on 50:1 leverage for cash flow purposes.
The sh1t hits the fan due to some unforeseeable event, the client goes belly up and the bank has no claim to what little assets remain after liquidation.
To make matters worse, the hedge was a terrible call and the FX cross tumbles due some bad economic news.

Would the bank also be leveraged when it took the trade and what would be the next step?

Sounds to me like the bank made an uncollateralized loan, whether on purpose or by accident.

I think the bank's on the hook. Next step? Close out I would have thought.

Never worked in a bank so take with salt but IMO the bank would offset their exposure (credit, IR, FX, everything) in the interbank market. The bank makes money from fees/spreads and leaves themselves with little exposure.

thought something like that but surely they cant offset everything on he cost of spreads

I thought you used to work in a bank? maybe just assumed because you come across quite quanty. Where did/do you work then?

MrGecko said:

Never worked in a bank so take with salt but IMO the bank would offset their exposure (credit, IR, FX, everything) in the interbank market. The bank makes money from fees/spreads and leaves themselves with little exposure.

Click to expand...

Who knows what banks do? Remember Barings?

True. Looking back it was a silly question. Forget it everyone and back to your exciting Friday nights.

I was just thinking about banks liquidating client positions and the effect on markets... all conjecture though.

Also, so many departments and subs I'm now thinking that they would probably be able to absorb anything anyway.

I worked in a bank many years ago. It's where I began my trading career. I'm sure this isn't unique but my experience was that the trading dept hedged positions and generally followed the guidelines set forth. These weren't retail clients though, mostly brokerages, other banks, etc. The problem was with the top level executives who knew retail banking and mortgage portfolios but nothing about trading, hedging, etc. They often saw potential $millions untapped because we hedged and so demanded we abide by their totally, completely, utterly f*** up schemes.

The bank was taken over by the Feds due to insolvency over poor interest rate swap decisions.

Peter