Illiquid Derivatives Intermediation
The equity option that is embedded in the equity structured product example from Chapter 4 is considered a standardized equity option. Normally, we say that in the case of a standardized derivative making a market is about understanding financial market dynamics and knowing at what price a hedge can be executed. However, while this option is standardized, it is not liquid, which means there is not a price that is being quoted in the interbank market for this option.
If there is not a visible traded market in a product, then that product’s price must be a function of another more liquid or more standardized product. The idea is that if a relationship exists between the tailored derivative and the standardized ...
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