Emerging markets derivatives: The central European option
Emerging markets derivatives: Latins learn virtue of credit swaps
For the brave, equity derivative products in south-east Asian emerging markets have been throwing up some exceptional opportunities. Local regulations, such as the inability to short stocks in many markets, have produced some spectacular swings in pricing on either side of notional fair value.
Taiwan has been one of the most prominent markets in this respect, with equity swaps fluctuating widely. Last year, when international investors were chasing the Taiwanese cash market, equity swaps ran up to 300 basis points over Libor.
This year, the rush to lock in some unexpectedly strong gains with hedging strategies and a far less certain equity outlook, have at times pushed equity swaps down as far as 1,300bp below Libor. Even after allowing for a dividend yield of around 2%, one-year equity swaps are still typically trading at around 8% below fair value.
Such variations are not found in the region's mature markets. The Japanese markets will sometimes deviate, but typically by no more than 20bp30bp from fair value in any quarter. A measure of the potential in Taiwan can be seen from what happened the last time Japan exceeded this, some two years ago.