Hybrid smiles made fast
Hybrid smiles made fast
Since the late 1990s, equity-linked structured notes have become increasingly popular with retail investors, particularly in Japan. These products, such as enmansai and uridashi, provide some controlled exposure to stocks or indexes by embedding derivatives payouts with a floating rate in coupon payments. Given the dependence of option prices on forwards – and of the latter on rates – the interaction between the implied volatility smile of the underlying equities and the interest rate dynamics
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