Autocalls hit peak vega, where hedging costs mount
Eurostoxx and Nikkei losses flip structured product dealers into painful short vol territory
Jitters are growing among structured product issuers as the stock indexes underlying popular autocallable bonds plunge through a shadowy inflection point known as peak vega, where hedging costs surge and losses can mount.
This fabled territory, where issuers of the products see their volatility sensitivity flip from long to short, has already been surpassed on the Eurostoxx 50 and Japan’s Nikkei 225. In previous stress periods, this has forced dealers to buy volatility in unison, inflating the
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