Basis Risk

BACKGROUND

A Linked loan yields the Indexed Rate. Since the lender cannot benchmark its own cost of funds to an indexed rate, its loan margin cannot be assured (absent some further transaction).  This is basis risk.

Whilst there are a variety of mechanisms by which this risk might be eliminated or attenuated, some of these inhere significant balance sheet usage and others entail the “jump risk” associated to discontinuous stock returns.

IMCO HEDGE

IMCO has developed a structure to address these issues. The resulting hedge is assuredly delta neutral. Notably, the cost of the hedge is priced into the Indexed Rate.  Hence, all of the examples referred to in this website incorporate this cost.  We would be pleased to outline details of our hedge program upon execution of the Confidentiality Undertaking referred to here.