APPLICATIONS OF OTC EQUITY DERIVATIVES
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 strategies | Outperform benchmark | Equity swap | ||
Hedging strategies | Risk management | Exotics, swaps, debta | ||
Spread strategies | Risk management | Equity swaps, exotics | ||
Market access strategies | Reduce costs | Swaps, debt, warrants, exotics | ||
Changing equity exposure | Reduce costs | |||
Index funds | Outperform benchmark | Swaps, debt, exotics | ||
Standard | Swaps, debt | |||
Enhanced | ||||
Style | ||||
Asset allocation | Risk management | Swaps | ||
Active manager transition | Cost management | Swaps, 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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