Hedging pipeline risk

Robert Benson looks at the task of managing pipeline risk and finds that analysing the sales patterns of previous offerings can provide a reasonably accurate estimate of future sales. For new entrants, however, the risk of mis-estimation is potentially larger

Retail providers that offer structured products are typically faced with having to manage so-called pipeline risk. This arises from the fact that the terms of the product have been fixed for the investor but the volume of final sales is unknown until the end of this period, while the price of the underlying assets used to hedge the product (i.e. the underlying derivatives) will vary.

Since the price of the derivatives will fluctuate, providers usually estimate the expected total sales in advance