The gamma trap

While issuance of exotic interest rate-linked products has waned this year, concern about dealers' hedging of these structures, and the potential for it to prompt market disruption, has grown among some participants. Are the jitters justified? By Navroz Patel

A conspiracy theory, of sorts, has emerged in the interest rate derivatives world this year. The theory, espoused by the clients of interest rate derivatives desks and even some of the sell-side traders of vanilla products who sit on these desks, is that the dynamic hedging of constant maturity swap (CMS) spread-linked issuance by dealers is distorting pricing and volatility in the vanilla swaps market. What's more, there are concerns that any future inversion of the swaps and CMS curves will