The equity swap product allows investors to express views on how individual stocks or indices are expected to move. For example, a US investor wishing to take exposure to the Chinese market could trade a USD denominated swap that references a particular asset in that market. By using an equity swap the investor is not required to buy the underlying asset.
From an investor’s perspective, options could be used for a variety of reasons, which include:
- Expressing directional views
- Portfolio downside protection
- Trades that benefit when the markets are either volatile or range-bound
- Yield enhancement
Exotic options include so-called path-dependent structures (e.g. barrier options) or correlation-dependent instruments (e.g. ‘worst of’ options). These can be used on a standalone basis but are also embedded within structured products that can be offered to a wider range of potential investors.