The ‘Good Banker/Bad Banker’
Exercise
Keith C. Brown
Donald J. Smith
Derivatives Strategy 5, 2000, pp. 43-46
Devising a derivatives strategy begins with
identifying a problem that needs to be resolved. Once that problem is understood, the solution
is often largely a matter of technical detail.
However, correctly identifying the underlying exposure is not always a
simple matter. In this paper, we present
an exercise in which a bank relationship officer is asked to recommend to a
corporate client one of two derivative-based solutions to the problem of
managing the firm’s outstanding callable debt issue. Given the company’s view on future
interest rate movements, one of the solutions is definitely the right answer
while the other is definitely the wrong choice.
Which strategy does the “Good Banker” select and which does
the “Bad Banker” choose?
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