A change in this field was introduced in October last year, which in principle means that pharmacies are obliged to exchange a drug in a prescription for a cheaper equivalent (generic) unless the customer is willing to pay the difference. The effect of this new regulation, combined with patents expiring, has led to significant price competition. Pharmaceuticals companies have gradually lowered their prices through more than 3,500 reductions, which benefits us as individuals when we purchase prescription drugs and as tax-payers as the cost of the county councils’ subsidies for prescription drugs declines. Pharmaceuticals’ costs are included in CPI as one of many sub-indices and are intended to reflect the average household’s costs for prescription drugs. Over the past ten years this index has risen at an average rate of 12 per cent a year. Now this increase has been turned around to a small decrease. The difference between the historical rate of increase and the current price fall corresponds to a 2 saving of approximately SEK 1 billion a year for Swedish households. Correspondingly, the county councils’ costs have been reduced by approximately SEK 2 billion. There are large sums involved here and they deserve some attention. Nevertheless, it is difficult to find articles dealing with these large savings and with the increase in competition. The main aspect appears to have been lost in the media. Instead, one finds articles on the difficulties for our monopoly company Apoteket to adapt, as it exists on a margin of approximately 20 per cent.

This is usually a very effective risk management technique during periods when CDS markets function normally. But it is worth emphasizing that the embedded “jump to default” risks in credit products, coupled with liquidity issues during times of extreme stress, can make it very difficult to execute a dynamic hedging strategy in stressed conditions. In addition, and as already noted, CVA hedging is likely to be undertaken by buying CDS from another bank or a hedge fund. In this example we have tail-risk correlation not just with corporate and counterparty risk but with CDS market liquidity. If proper consideration to the correlation structure is not applied, the danger is clearly that the realized outcome in extreme scenarios would look very different from what was expected by senior management, regulators, etc., based on local analysis. A fourth example from the recent crisis was the “super senior” credit exposure from pools of US mortgage loans reinsured with monoline insurance companies (MBIA, FGIC, AMBAC, etc) or other insurers such as AIG. Banks and other originators of leveraged credit risk (either in cash form of CDOs or CLOs, or in its synthetic forms) needed to warehouse excess “super senior” tranches, which were considered virtually risk free, to support the origination business. After the volatility experienced in 2005, banks started to worry about controlling the mark-to-market volatility, even though the fundamental risk initially continued to be considered negligible. The idea came to lay off a significant portion of this negligible economic risk to reduce the short and medium term price volatility.