Credit portfolio managers are increasingly executing risk management strategies which generate income as well as reduce risk. Robin Lenna, head of credit capital management at FleetBoston Financial in Boston, said risk managers are embracing a wider range of strategies, including capital arbitrage and exchanging risk with similar entities to diversify their portfolios (DW, 2/10).
Risk exchanges have been one of the more interesting risk management strategies to arise recently, said Lenna, although noting that not many such trades have been completed. Under this system two firms swap risk and become protection buyers and sellers of identically sized reference portfolios, with fees for the trade being effectively cancelled out, she explained, adding that typically no dealer sits in the middle of the transaction. In addition to offsetting risks, benefits afforded by this process include a greater diversification of exposures, she said. "Like all marriages, however, the trade suffers from the difficulty of finding a good partner," she added.
