Position Management and Hedging

Market risk does not only occur in trading book but also in the banking book, because the position of the banking book valued exchange rate and the current commodity value. Management interest rates in the banking book is usually done by the Treasury.

Manajem market risk in banking book done by the Treasury the right to take a position until the limit set by the bank. This activity should be strictly controlled and independently to ensure knowing the risks.

Traders manage risk by trading in instruments that match their risk position. This method is not always profitable, so that frequently used hedging techniques. Traders can hedge their risk by taking the right position on the instrument being traded, or on different instruments. These instruments can have different characteristics but the change in market value will reflect the original transaction, so for all dihedge portfolio at the market price changes will result in little or no change in market value of the portfolio. Often a transaction must be some kind of hedge to match.

Trader will conduct hedge with a more liquid instrument of instruments that are traded so that they can perform faster hedgingnya strategy, dealing addition cost would be cheaper for a more liquid market.

The advantage of derivatives (hedging) from cash instruments (such as loans):
- Lower credit risk
- Lower funding needs
- A lower capital charge
- Greater liquidity
- Dealing a lower cost

However, hedging management requires a more careful because the instruments used are not the same as original transaction. There will be some residual risk that is not to be counted tercover and controlled. In a large trading positions, the interaction between hedge and long risk positions can create new risks.

Basis risk is the residual risk of the most significant and occurs in the portfolio with the same transaction. Basis risk is the risk of change in the relationship between the price at the position and price risk instruments used to hedge the risk position. This risk occurs in situations where the market price for each type of instrument has a different but interconnected.