Equity derivative products
Hello team,
I wondered if anyone can give any real-life explanation on any of the following equity based products:
- FVAs
- Swaptions
- Corridor Varswap
- synthetic covariance swap
- Geometric dispersion
- CVS
- Quanto option
- Correlation swap
Input would be much appreciated and could even spark a lively discussion.
Thanks
Bondy
Since I am waiting for someone, here you go. Firstly, are you sure these are all for equity derivatives space? Some are pretty uncommon and more frequent in rates or FX. I rearranged them by commonality and degree of difficulty, will do half now and half later when I am drunk enough:
CVS (I think you mean CvC) Call vs Call, a basket of calls against a call on a basket. The simplest possible way to trade correlation (well, covariance).
Quanto option An option that tracks an asset but pays out in a different currency difference from the domestic currency of that asset. E.g. an Dec put on SPX struck at 2500 where both the premium and the payout will be in Eur. Obviously, correlation between the asset and the currency will matter a lot :)
Corridor Varswap It's a variance swap that only accrues variance on the days when the index is in a specified range. A regular variance swap pays off (realized_var - strike^2)vega_units where var units are vega_notional/(2strike) and realized_var = sum(ret^2)/n. So your payoff in a corridor swap would be similar (realized_var_in_range - strike^2)mod_vega_units where var units are (n_in_range/n) * vega_notional/(2strike) and realized_var = sum(ret^2 in range)/n_in_range. Usually these are done to take advantage of the steep skew - e.g. you'd sell a "100% down-var" where you only accrue variance if spot is under current 100% and that obviously would be pretty expensive.
FVAs - forward volatility agreement. It's an agreement to buy or sell a forward starting straddle, e.g. you agree to buy a straddle on SPX that will strike in 1 month and expire in 2 month. You rarely see them trade, to be honest these are more common in the FX world.
Swaptions - I assume we are talking about variance swaptions, considering the below. It is right to buy (receive) or a right to sell (pay) in a variance swap, e.g. I buy a Dec/Mar receiver swaption struck at 12 means that I will have a right (but not an obligation) to enter into a variance with these parameters. FYI, there are also equity swaptions, which are options to enter into an equity swap and rate swaptions which are options to enter interest rate swaps. The idea is the same, but the risk is very difference .
synthetic covariance swap Well, thats a swap that pays you covariance between several assets vs a fixed correlation*average_vol. You can think of it as a basket of variance swaps against variance swap on the basket (it kinda decomposes to that). Unlike the correlation swap below, can be priced and decomposed better. Very expensive, very hard to find dealers to quote, nearly impossible to get out. Usually dealers push these onto clients when they want to lay off some correlation risk.
Thank you very much mate! Helped a lot. I understand math behind it, but it is still very difficult to know why/when and how (in the scope of markets) certain products work.
Hope you had a good night (obviously must have had ;)).
If you have the chance to explain Geometric dispersion that's maybe the toughest so far. And yes they are all for Equity (some Xasset).
Since most exo desks are short correlation up the wazoo, the bank structuring desks are trying to pitch geometric dispersion to funds since it's a better layoff structure. From a volarb PM perspective, it's a worse trade than arithmetic dispersion (a simple backtest will show you that) - you don't get the single name vol convexity aspect that you get with arithmetic dispersion.
so, you gonna be a fresh monkey on an equity exotics desk? may I ask which desk?
PS. apparently, autocorrect thinks "volarb" is "vile Barb" :D
By FVA - do you mean forward volatility agreements? a quanto option is a "quantity adjusted option" to reflect the difference in the currency of the underlying vs the payoff the instrument. For example, a put option on SPX that pays in EUR. Is a USD put quanto euro on spx
What is a forward volatility agreement? Var/Vol swap starting in the future?
Equity Derivatives fashionable products.... (Originally Posted: 02/07/2010)
what are the new
in
products in Global Equity Derivatives?structured notes ? PP notes? equity monetizations? double, triple leveraged ETFs?
how do you manage do diffferentiate yourself from a Sales perspective compared to anyone else in those products?
honestly, you dont. Once one bank designs it, every bank on the street copies it. its all about customer relations and providing color, advice, etc. etc. and after awhile the guys on the other end won't want to speak to anyone else.
just like fx and the other crap then...
i like oyur shoes, face, tie, so i deal with you...kinda thing?
I think PnL is right, its a relationship thing. By the way, I just want to give you guys a heads up about a new website on trading strategies/financial talk. For those interested, it is www.moneyhawker.com.
Shoes and tie? no. its more like i like your ideas and you get me good prices and your traders dont fuck me everyday sort of thing.
sorry, i had the ideas part as a
constant
. I get your flow though..i always wondered though... For some instruments like the leveraged etf, is it the Client who comes up with the idea and then seaches for the bank who can best structure the deal and mitigate risk, or is it the other way around, whereby the sales teams pitches the idea to say
Horizons Betapro
... that part always was a little shady for me...I think it is both, some customers will compare different banks and Capital Market RMs will try to cross sell these products to customer.
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