Analysing, structuring and executing an appropriate hedging strategy or even unwinding an existing hedge can be complex and costly. PegCap can assist clients and their advisors with the following:
The starting point for many discussions around hedging start with an understanding of why a hedge is needed.
We work within a clients’ existing budget and forecasting models to overlay a hedging strategy, including any upfront costs, running costs and the cost of any options. For more complex portfolios with a number of financial hedging instruments or with embedded options, we use our proprietary discounted cash flow models and analyse the impact of interest rate movements on the overall portfolio.
Advice on formulating and structuring an appropriate hedging strategy based on our understanding of the clients’ business needs.
We look at the business itself and why it might need to hedge, what term it would look for, what the cash flow implications might be and what hedging product would be most appropriate. We believe it is far better to analyse the relevant options beforehand and to ensure the implementation of an appropriate structure at the outset. This looks to avoid the inconvenience, cost, time and effort involved in unwinding an inappropriately structured deal.
Once an appropriate hedging strategy has been agreed with the clients (and their bankers), we undertake a thorough review of the pricing based on our internal proprietary models, the prices quoted by the market makers and the price feeds from the data providers.
Having experienced the derivatives markets first hand during and post the Lehman crisis and the effects of the ever changing regulatory regime, we understand the stress points for banks from both a capital and credit risk perspective. With the need to allocate more capital to certain derivative instruments and the varying cost of credit depending on the financial strength of the counterparty this experience has never been more relevant. This enables us to understand the requirements of all interested parties and to achieve fair pricing and best execution.
Once the hedge is structured and executed we make sure that clients get a regular update on the value of their position(s) as part of our on-going service. We will undertake valuations for both financial and regulatory accounting purposes including for hedge accounting purposes, where non qualifying hedges can have a significant impact on the volatility of P&L. In addition we can act as valuation agents for portfolios held by corporates, banks, asset managers and pension funds, where an independent valuation is required or deemed to be best practice.
In particular we are able to provide a specific valuation service for compliance with Financial Reporting Standard 102 (FRS102) which provides independent fair value calculations for Audit purposes, including Transition valuations.