Vol target index
The US annuities work is worth a closer look. Structurally, the business is built on volatility controlled indexes, on which dealers sell huge amounts of option strips, known as cliquets – typically forward-starting one-month calls.
Because the volatility of the underlying is, theoretically, known in advance, the cliquets generate relatively thin premiums, but they still have the potential to trip banks up – in times of stress, realised volatility can blow through the target level. Last year’s big moves in US stocks brought these risks to the fore, prompting some dealers to hike premiums on the instruments or to shrink cliquet capacity altogether.
The US annuities work is worth a closer look. Structurally, the business is built on volatility controlled indexes, on which dealers sell huge amounts of option strips, known as cliquets – typically forward-starting one-month calls.
Because the volatility of the underlying is, theoretically, known in advance, the cliquets generate relatively thin premiums, but they still have the potential to trip banks up – in times of stress, realised volatility can blow through the target level. Last year’s big moves in US stocks brought these risks to the fore, prompting some dealers to hike premiums on the instruments or to shrink cliquet capacity altogether.
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