JP Morgan Chase launches 'equity default swaps'
JP Morgan Chase has developed an 'equity default swap', an equity-triggered derivatives product structured like a credit default swap.
Equity default swaps are referenced to an underlying stock, and allow investors to hedge out equity risk or to speculate on a company's credit-worthiness. They have very similar features to digital options, paying out a pre-arranged amount, typically around 50% of the underlying, if the reference entity drops below a certain trigger, typically between 50% to 70% of the initial value. But JP Morgan Chase said its equity default swaps differ from a normal digital option due to their similarity to the credit default swap-like structure. And the US bank is marketing the instrument as a tool to accompany credit default swaps. Equity default swap protection buyers make regular payments through the life of the option, unlike the one-off payment of a digital option, said Peter Allen, head of JP Morgan Chase's European equity derivatives strategy group. Allen said this reflects the amortising payments of credit default swaps. The product, which has been marketed by the bank for the past two to three months, generally trades at much higher spreads than credit default swaps, reflecting the greater risk of the underlying event occurring, said Allen. For example, a typical equity default swap on Deutsche Telekom is likely to trade at around 435 basis points, compared with its equivalent credit default swap, which would trade at around 127bp. “Comparing equity default swap and credit default swap spreads allows investors to choose the most attractive vehicle for taking or hedging credit-like exposure,” said JP Morgan Chase in an analyst report.But other bank analysts were sceptical about the product, saying equity default swaps are very similar to traditional digital options. "This is not a new product," said Johan Groothaert, head of structured and investment products within global equity derivatives at Deutsche Bank. "We have seen similar digital deep out-of-the-money puts with knock-in features before."
JP Morgan Chase said the 'equity default swap' name is a proprietary term developed by the bank itself, but hopes the product will catch on in the wider market. "This is a new avenue and has high growth potential – it could quickly develop into a liquid and tradable spread market acting as the equity equivalent of the credit derivatives market," said JP Morgan Chase’s Allen.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Markets
Regulatory crackdown puts Korea autocalls in deep freeze
Mis-selling fears see distributors pull back, leading to 40% issuance fall in a month
Invesco more than triples size of its FX options book
Counterparty Radar: Manager’s portfolio exceeded $5bn notional in Q4
Volatility shape-shifters: arbitrage-free shaping of implied volatility surfaces
Manipulating implied volatility surfaces using optimal transport theory has several applications
BGC forming consortium to take on CME Group’s rates empire
Banks and PTFs are being offered a stake in FMX, which has CFTC approval to launch a futures exchange
RMB vol returns as hedge funds take barrier trade profits
Unwinds of exotic positions saw vol jump 72% after surprise PBoC move last week
‘Fear gauge’ within expectations, some say
Several options specialists dismiss claims that structured products are distorting the Vix
Brazil readies long-dated FX hedging scheme for green projects
Development bank IDB will lend its credit rating to unlock cheaper USD/BRL hedges out to 25 years
Options market still searching for cause of the Vix plunge
BIS paper blames yield-enhancing structured products, but market participants are unconvinced
Most read
- As FCMs dwindle, regulators fear systemic risk
- Top 10 op risks: AI fears drive cyber risk to record high
- Top 10 operational risks for 2024