It is difficult to obtain first-hand evidence of activity in the over-the-counter derivatives market but trends in the Euro-medium term note (EMTN) market tracked using Euromoney MTN-Ware can be used as a good approximation for those in the derivatives market as a whole.
Claims that principal protection is an absolute prerequisite seem only partly true. A recent lira-denominated note linked to the Milan MIB 30 equity index carried the redemption formula 100% + {80.50% x [(MIB 30 18165)/18165]} where MIB 30 is the closing price of the MIB 30 on January 14 1999. There is no principal protection in this note and investors lose 18.46% of their money if the index drops to 14,000. If the index drops to 10,000, redemption is just 63.81%. However, most of the equity index trades in the market and the indices of European high yielders such as Spain and Italy are popular are principal-protected.
The number of Emu-related swap spread trades indicates how much convergence/divergence plays dominate investors' and traders' thinking currently. Straightforward swap-rate-linked structures are common. A recent two-year Deutschmark swap-rate-linked note denominated in Italian lira offered investors annual returns of up to 49.93%