Finding the right balance
When assisting clients in shaping the overall risk profile of their investment portfolios, private banks need to be prudent in using investment leverage and derivative solutions as these are not without pitfalls.
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FOR quite some time now, investment leverage and derivative solutions have been pervasive features of investment portfolios of private banking clients. The investment thesis underpinning these developments is irrefutable: investment leverage and derivative solutions are tools that assist clients in shaping the overall risk profile of their investment portfolios. They make it easier for clients to execute portfolios that more closely reflect their risk appetites, allowing them to disaggregate and to defease specific risks. The use of investment leverage and derivative solutions, however, is not without its pitfalls.
PITFALLS
The common pitfalls of using investment leverage and derivative solutions include: (i) currency mismatches (ii) term mismatches and (iii) misuse of leverage. These pitfalls impede the construction of investment portfolios and customer balance sheets that would be resilient to economic and market shocks.
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