by Jim Blaine
Derivatives: Part III - "Just Plain Vanilla"
Here's the key ideaunderlying the NCUA Board's proposal to permit large credit unions to trade in derivatives (NCUA Board Action Bulletin-5/13/2013):
"Credit unions applying for the authority must demonstrate how derivatives will be part of an overall interest-rate risk mitigation plan."
So, let's parse that a bit; the sentence has three basic assumptions:
1) Too much interest rate risk (IRR) can be bad for a credit union.
2) Credit unions with too much IRR should try to reduce ("to mitigate") excessive interest rate risk.
3) Derivatives are the answer... at least for some credit unions; but only if they are large, and only if they are.... and are... and also are... and, and, and...
A severe problem arises with the third general assumption that derivatives are a safe, empirical ("'ya just can't miss"), "answer-to-all-prayers" solution to the issue of CU interest rate risk.It just ain't true !!
