The array of OTC derivative-based equity portfolio management strategies cuts across the two primary categories of investment philosophy—active and passive management. We consider several strategies in this section, which are listed in Exhibit 15.1, together with the purpose of using an OTC derivatives and a product candidate.
Exhibit 15.2 summarizes various OTC equity derivative structures in terms of the role of derivatives for long-term investors and hedgers.269 A broad spectrum of equity investment activities emanating from the role of derivatives can benefit from these three basic categories of OTC equity derivative structures: options and exotics, equity-linked notes and equity swaps.
EXHIBIT 15.1 The Use of OTC Derivatives for Equity Strategies
Equity Strategy Purpose Product Candidate
Return-enhancement strategiesOutperform benchmarkEquity swap
Hedging strategiesRisk managementExotics, swaps, debta
Spread strategiesRisk managementEquity swaps, exotics
Market access strategiesReduce costsSwaps, debt, warrants, exotics
Changing equity exposureReduce costs
Index fundsOutperform benchmarkSwaps, debt, exotics
StandardSwaps, debt
Asset allocationRisk managementSwaps
Active manager transitionCost managementSwaps, exotics
aDebt refers to equity-linked debt products.

Creation of Structured Product Solutions

One of the most important applications of derivative securities is in the creation of structured product solutions to the ...

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