Nikkei sell-off puts Japanese autocall dealers on alert

Risk recycling may backfire if index slump continues

Uridashi dealers have fallen foul of sharp movements in Japan's benchmark index

Exotics desks in Asia are holding on to orphaned hedges on Nikkei-linked uridashi products that threaten to become very costly if the sell-off in Japanese equities continues, traders say. 

Dealers in Japan have been making increasing use of corridor variance swaps to hedge their sensitivity to volatility, known as vega, which increases as autocallables are issued. But when the Nikkei 225 rallied to a 27-year high in autumn last year the majority of products issued before November knocked out –