Riding the tiger of volatility
Equity-linked products with low principal risk face a problem when interest rates are low. There’s too little discount on a zero-coupon bond, especially a short-dated one, to give the investor much upside on stocks using options. One investment banker says: “The solution is to look for exotic options to provide geared exposure.”
Since 1997, barrier options have become almost plain vanilla. A knock-out call, for example, is cancelled once the underlying stock hits a trigger level.
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