Correlation starts to bite for structuring banks

Banks that create and structure products are starting to feel the pinch from falling equity markets. Although these markets may have been going through a reprieve towards the end of last month, this uptick in fortunes is perhaps temporary.

Meanwhile, the banks are starting to feel the costs of the short correlation positions that almost all of them have. This is how it works. When selling a call option on, say, a basket of indexes - typically two, three or more of the DJ Eurostoxx, FTSE, Nikkei