Hedging the hard way

The equity derivatives businesses of structured products issuers took a severe beating in the final quarter of 2008 as banks found themselves wholly unprepared for the extreme swings in volatility and correlation caused by the Lehman Brothers collapse. In such a scenario, managing equity derivatives books has proved fraught with difficulty. Dealers have been hit on all fronts, from quanto options to dividends to gap risk. Compounding their woes is the fact that this is the second bout of losses

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