Corraling correlation
Equity correlation remains one of the most important risks on structured product issuer's books. The growth in correlation transfer mechanisms during the past two to three years means this risk seems manageable for now. But what would happen in the case of a market downturn? Sarfraz Thind reports
“Correlation has grown to be the biggest risk of a department, and indeed the biggest risk on our books,” says Alan Zagury, head of risk management trading within equities exotics and hybrids at JP Morgan in London. “Around 90% of structured products with correlation exposure issued by a bank are actually short correlation.” Correlation risk defines the mark-to-market change in the value of an asset when the correlation between underlying assets changes in a portfolio.
Dealers have built up
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