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SA6 Sept 2018 Q2 (iv)

R

radex

Member
The examiners report mentions 'best execution risk'.
Can anyone explain the meaning of this concept?

Thanks
 
Hi
Yes this is an odd one. The answer says:

Best execution risk [1]
Swaps are typically traded over the counter and execution risk is therefore typically larger partly due to information asymmetries

Execution risk sounds like the risk that the process of executing the trade is inefficient and leads to a swap being transacted at a poor rate. This can certainly happen easily if you are trading in OTC derivatives such as swaps, and dealing in large size in an opaque market. My interpretation would be that the LDI strategy leads to the necessity of dealing in large size in illiquid OTC swaps, and that the risk of poor price execution is high.
 
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