CBOE RMC Presentations on Structured Products & Their Impact on Markets

Informative presentations on “Structured Products & Their Impact on Markets: What You Need to Know” at the CBOE Risk Management Conference Europe on Sept. 5th in Ireland by —

(1)   Ms. Delphine Leblond-Limpalaër, Equity Derivatives Specialist, Société Générale, and

(2)   Mr. Peter Murphy, Founder, P. M. Murphy Ltd.

Topics covered by the speakers included —

– Structured products around the world: who and what

– How the market is evolving: drivers and outlook

– A significant impact of the traditional vol/skew relation

-The other major parameters: Repo and dividends

Many structured products have optionality features, and in past years there have been structured products that tracked the returns of CBOE indexes such as the CBOE S&P 500 BuyWrite Index (BXM) and the CBOE S&P 500 PutWrite Index (PUT).

PRESENTATION BY PETER MURPHY

Mr. Murphy said his firm provides (1) Investment advice and portfolio construction mainly for high-net-worth clients on a fee-only basis; (2) Distribution of investments (structured products and funds) to other advisers, stockbrokers and others; and (3) Sub-advisory mandates to funds (for example, a multi-asset fund looking to run a structured product strategy within the fund). Mr. Murphy said his clients want strong returns but most clients are not aware of investment concepts such as gamma and theta.

He said that the most common structured products include –

(1)   Autocallable bonds = 65-70% of market (estimate for UK market) (a) Classic autocall based off an index or indices; (b) Defensive autocall (index or indices), (c) The above but the underlying is a stock basket.

(2)   Reverse convertible. Coupon of (say) 6% annually as long as the underlying index is above say 80% of its starting level.

(3)   Hybrid of those two: Autocallable above 100%, coupon payable above 80% and a European protection barrier above 60%

(4)   Not so common but very interesting: Twin win on an index, i.e., straddle

All of the above have conditional capital protection, usually between 50-70% of strike and can be American but most often European barrier.

Mr. Murphy said that in the future it is possible that we will see — More institutional use of structured products; Wider variety of underlyings; Better quality product (when interest rates go up!); and Possible alternatives to using a zero coupon bond as the capital protection.

PRESENTATION BY DELPHINE LEBLOND-LIMPALAER

In her presentation on structured products, Delphine Leblond-Limpalaër noted that —

–       Variable annuities are popular in the USA, while autocallables and capital guaranteed products are popular in Europe.

–       Differences across regions are driven by product, liquidity, balance of flows.

–       Asia is all about volatility and skew.

–       Europe focuses on dividends and repo.

OPPORTUNITIES: in all cases the slope is key. There are a lot of opportunities for those who know the flow.