Sizing up skew

Structured products providers' methods for hedging skew are fairly homogeneous. Some banks, however, are searching for ways to refine their approach to hedging by transforming skew risk into an investment palatable to sophisticated investors. By Rachel Wolcott.

Any serious structured products house will be exposed to skew. These days, most banks are content to hedge this risk using vanilla strategies. However, a small faction of equity derivatives players believe there is a better way to cope with skew exposure. They argue that products purpose-built to pass skew to investors will give banks a more accurate hedge. Others contend these new products do not serve to repackage any risk per se, but are simply another financial instrument.

"There are complex