4

The paper is generally correct, but it is not a general statement, as in a general truth of options hedging in a theoretical context, rather a statement regarding how the structured derivs market is typically set up: retail and institutional investors buy a large number of products that at their core entail the dealer buying (from the investor) long-dated (...


3

To add to the above on a more practical note: In general, SP desks make money on the individual product when the underlying declines. Dividends make the underlying decline, hence they are naturally long dividends. Take an auto-callable product which is exercised if the spot is above a pre-determined strike each year and say the SP desk sells this ...


3

In my estimation, you are best-served by creating these sheets from scratch. There are a number of reasons for this: You will thoroughly understand the underlying machinations of each calculation You can customize to your specific needs, and so on... If you are looking for some decent introductory texts, I have benefited from Moyer Excel Templates. More ...


3

If a structured product trader can directly hedge in the market, he will usually do it. Here your example is a little too simplified, many structured products have features that cannot be easily hedged in the market because they are path dependant (barriers), or illiquid (typically a 5 years 60% put on a single stock). Let's take your product, but imagine ...


2

What you seem to be missing is $$\sum_{i,j} w_i w_j \sigma_i \sigma_j = \left(\sum_i w_i\sigma_i\right)^2$$ Now apply Jensen's inequality to get $$\left(\sum_i w_i\sigma_i\right)^2 \leq \sum_i w_i\sigma_i^2 $$ QED (note that nonnegative weights is a crucial assumption here)


2

You generally can’t. There aren’t enough suppliers. Therefore you end up living with it , which means that the correlation between US swap rates and USDJPY Fx can get very high since many dealers have it.


1

In the simplest case, he books the structured product as a sale of the call at 5, he then enters the market and buys a call at 3, so he pockets 2 on the trade.


1

Point of clarification : are you asking about required returns in pounds sterling for projects conducted in the UK? If so, you also need to adjust for any difference in risk free interest rates between Euro and UK. You can do this be comparing 5yr UK gilt yields with 5year German govt bond yields , for example. I believe the UK yields are higher, so you ...


1

It depends. Is the project being carried in the original place or moving to the UK? If the project keeps being in the original place (i.e. euro zone) and you want the IRR in GBP, then you need somehow to factor in the currency fluctuation for the cash-flows. That can be done either through adjusting the cash-flows with an expected exchange rate or by ...


1

Just to add a remark on top of Ivan’s excellent answer, note that the core reason IB package those KI puts in the autocallables and other SP for investors is not just in order to make the coupons more attractive to the investors but fundamentally to buy back the volatility skew that the vanilla desk is structurally seller of.


1

In your example, the buyer of the PRDC security is a Yen-based investor who gets long the BRL on a forward basis, on each coupon date and on the final maturity date. Because BRL is a lot cheaper forward than spot, the investor gets a high coupon for taking this risk. You can think of the risk taken by the investor in 2 ways, either (a) long the BRL forward ...


1

I am not aware of global figures. But for the European market for structured products, you can have a look at www.eusipa.org. They aggregate the national figures, including the German ones that you probably found on www.derivateverband.de.


1

I'm not aware of any exercises. You do not mention whether you tried Google. A good set of spreadsheets is on the Home Page for Aswath Damodaran. You could convert it into "exercises" by first working through them yourself and then comparing to Damodaran's solution (or whether it gives the same results).


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