Hedging the hard way

Quanto options have stung dealers' equity derivatives books after the unexpected spikes in volatility and correlation that followed the Lehman Brothers collapse, while structured product issuers have been hit by plummeting dividend expectations and losses as they combat gap risk and hedge volatility. Matt Cameron reports

The equity derivatives businesses of structured products issuers took a severe beating in the final quarter of 2008 as banks found themselves wholly unprepared for the extreme swings in volatility and correlation caused by the Lehman Brothers collapse. In such a scenario, managing equity derivatives books has proved fraught with difficulty. Dealers have been hit on all fronts, from quanto options to dividends to gap risk. Compounding their woes is the fact that this is the second bout of losses