Totally skewed: US annuity hedges magnify S&P volatility
Sales of fixed indexed annuities are soaring in the US. But dealers’ hedging of the products is being blamed for pushing up S&P 500 skew, and their complexities are dampening banks’ appetite to underwrite the instruments
Structured products have a nasty habit of undermining the foundations of the equity markets they track. Over the past year, for instance, stock index volatility and skew – not to mention certain foreign exchange pairs – have been influenced by dealers looking to hedge popular autocallable products.
Traders now claim to see similar dynamics in the largest index of them all – the S&P 500 (SPX) – thanks to US investors' enthusiasm for annuity products, in particular variable annuities (VAs) and
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