The dividend divide

European dealers are clashing over the proper way to assess dividend risk in structured equity products. Some dealers say their competitors have it all wrong – and may lose their shirts.

Some of these dealers say the situation resembles the overambitious expansion by a number of European regional banks – typically state-backed – several years ago into the market for cliquet-like options products. These banks botched their volatility models, and while their unrealistic hedge assumptions allowed them to undercut traditional market leaders in pricing, the house of cards collapsed last year when high equity volatility levels caused a catalogue of trading losses (Risk July 2002