He is then in a position to evaluate what, if any, coverage changes might improve that position. This report allows evaluation of the profit impact that a proposed alteration would have on the existing pipeline and coverage position. This allows the risk manager to test various alternatives - to examine different hedge tools in order to tweak the overall profit profile before actually implementing a change in the position. It is also useful as a planning tool to gauge optimal timing for hedge alterations. The resulting profit profile produces an exciting potential.
Profits improve dramatically in both a rising and a falling rate environment.
In this case, the MBS pair-off gains more than offset the call option premium cost. Invariably, the coverage that creates the most desirable profit profile over a wide range of market conditions will contain a blend of several hedge instruments. The above examples show the ability to macro manage the profitability risk associated with the pipeline and existing coverage, and to graphically quantify the risk as rates change. These reports require very little time to run and can be generated at will throughout the business day. But in reality, the tools are available at a relatively modest cost compared to the consequences of not having these capabilities.