A report published by options pricing and valuation specialist SuperDerivatives unsurprisingly supports the findings from the Bank for International Settlement’s Quarterly review published in December that is that there has been a bounce back by end users of derivatives. “Our analysis reveals continued growth in the use of FX, interest rates, energy and commodity derivatives because they retain a crucial role supporting real, physical markets, in terms of hedging currency risk, managing resources and enabling cross-border trade,” says David Gershon, SuperDerivatives’ chief executive.
SuperDerivatives is upbeat that the derivatives market will continue to grow, but for now its figures point to a definite move toward the greater use of vanillas. One exception though is an increase in the use of target redemption notes (Tarns). These are not strictly hedges, but buyers see them as useful, I’m told, for improving strike levels, while banks like them because they still have a lot of fat.
One line in the SuperDerivatives’ release made me smile: “Knock-outs continue to be purchased by clients for a reduced premium, as opposed to a vanilla option, hoping that the option will never knock out”. It was battered into me at an early age that hope has no place in risk management.