Sunk by correlation

Equity derivatives dealers faced a grim picture across global markets earlier this year, with steep rises in correlation and volatility together with a slump in dividend expectations decimating exotic books. How have dealers responded? By Mark Pengelly

Equity derivatives businesses have seen their revenues riven by losses during the first half of 2008. The malaise in credit, brought on by excessive US subprime mortgage losses, took hold of major equity markets earlier in the year. Subsequent spikes in volatility and correlation, combined with a drop in dividend expectations, have conspired to cause mark-to-market carnage for dealers' exotic books, which some estimate runs into billions of dollars.

"Everybody's looking at their exotic books. We