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In the world of fixed income markets, hedging against interest rate exposure is one of the most essential aspects of risk management. This is especially true for market makers. Client trades leave the desk with exposure to rate risk across the tenors clients trade and due to adverse selection
US markets ended the week with a relief rally after September’s employment report on Friday weakened the probability for another immediate Federal Reserve rate increase later in October. Nonfarm payrolls rose by just 29,000, while the unemployment rate rose up to 4.2%. July and August employment gains were revised down by a combined 60,000. Wage growth also fell to its lowest annual level since May 2021
Most of the work on a trading idea goes into finding an edge. Much less goes into the second question, which is how much capital to put behind it, even though a good bet sized badly can still lose money. A simple experiment reported by Haghani and White [2] makes the point.
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