Julius Baer offers alternative to options hedging
Switzerland’s Bank Julius Baer is expanding its equity product range by introducing investments that give downside capital protection by imitating options hedging on a portfolio.
“Options are very expensive due to the low interest rate,” said Markus Gonseth, Zurich-based head of the bank’s private banking unit. “And if you use options you are limited in time.”
Bank Julius Baer is marketing two products, which are being sold to fund managers as well as private clients. Its ‘Flex 90’ guarantees 90% of the invested capital will not be lost, with 25% of the investment exposed to the equity markets and the remaining 75% allocated to fixed-income investments. The ‘Flex 80’ comes with 80%-capital protection and an equity quota of 75%, with the remainder in fixed income. Flex 80 is aimed at “growth-oriented” investors, said a bank official.
Flex Allocator investments have no set maturity since they are structured as deposits, but Bank Julius Baer said an investment horizon of at least several years and a minimum investment of Sfr2.5 million (€1.7 million) is required.
Due to the limited number of underlyings – and other constraints such as time-to-expiry – on put options, dealers have devised alternative hedging strategies. One of these is portfolio insurance, which involves replicating options hedging by trading the underlying equity and fixed-income instruments. The portfolio is regularly rebalanced by buying one and selling the other, in line with the delta of the replicated option.
CPPI uses this technique but simplifies the process – rather than using complex mathematics to work out the exact delta, it approximates the delta by defining it as a constant multiple of the difference between the portfolio level and a pre-defined floor level.
Gonseth said he expects to sell several hundred million Swiss francs worth of the Flex Allocator during the next year.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Markets
China stimulus creates hedging headaches for HK warrants
Dealers say options liquidity issues during Hang Seng’s rollercoaster ride made the products tricky to risk manage and price
Low FX vol regime fuels exotics expansion
Interest is growing in the products as a way to squeeze juice out of a flat market
Currenex loses US court bid to reveal XTX trade secrets
Judge also rules the venue must reveal its own matching code in class action case
Intraday FX swaps could signal new dawn for liquidity management
Seedling market could help banks pre-fund payments in near-real time and reduce HQLA requirements
Isda calls for India IM delay
Rules for third-party custodians still to be finalised less than one month before initial margin rules go live
FSB exec dismisses leverage cap proposals for NBFIs
Tackling excessive leverage requires a nuanced approach instead of a broad cap, says Martin Moloney
US jobs shock leads to steepener unwinds
Rates investors caught out after October jobs surprise
Goldman Sachs retakes top FXO dealer spot with mutual funds in Q2
Counterparty Radar: Trades with SEI Investments boosts US bank to top spot