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Wondering what the most exotic/esoteric product you'v ever heard of. Could be anything from some fugazzi option to an esoteric abc. Just something fun.
To get the ball rolling, I heard a presentation where guys were trying to securitize offshore refueling services. Think like how military airplanes can refuel jets for long range flights but this is done on a commercial level for freight ships. Quite interesting!
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Cheng
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My all-time favorite: a 10y CDO, callable after 5 and 7 years, notional increases by 100% if no called (i.e. 200% after 5 years, 300% after 7 years). Of course the tranche was AAA rated...
Nobody back then (and even today) had a chance to hedge this option to whatever extent. So it was really toxic for both parties, buyer and seller. I hope this one never printed... |
"He's man, he's a kid / Wanna bang with you / Headbanging man" (Grave Digger, Headbanging Man) |
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frolloos
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| Total Posts: 38 |
| Joined: Dec 2007 |
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Variable annuities old style: put option on basket of mutual funds, buyer of option allowed to switch fund allocation at will, funds actively managed by some asset managers and generally unhedgeable, tenors of the option up to 50 yrs, add some lookback or ratchet features, and on top of that the buyer of option is allowed to die on you (the seller) withhout warning.
Insurers have sold lots of these nice little VAs. |
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pj
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Mine was a callable range accrual on a basket of Hungarian stock
with a FX barrier.
Interesting to price and hedge, even after you get the market data
and instruments (which you do not).
Anther one was
a swap where the buyer payed the coupons based on
1/(USDEUR-x)
where x was a rate which was approached to and then hit after a couple of years.
One structurer told me that in theory you could hedge that with vanillas.  |
The older I grow, the more I distrust the familiar doctrine that age brings wisdom
Henry L. Mencken |
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ronin
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| Total Posts: 314 |
| Joined: May 2006 |
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A long time ago, people talked about a "Mexican" option. It accrues a coupon every time the underlying crosses the initial strike.
So if the underlying started at 100, then goes to 101 and then to 99, you get paid. Next time it is above 100, you get paid again. Next time it is below 100, you get paid again. Etc.
Why was it called "Mexican"? Because a Mexican crosses the border, gets deported, crosses the border, gets deported...
As far as I know, nobody ever traded it. Or even showed it to a client. It was just an urban legend.
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"There is a SIX am?" -- Arthur |
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frolloos
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| Total Posts: 38 |
| Joined: Dec 2007 |
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| @ronin: first time I heard about the Mexican, interesting! Doesnt sound too difficult to hedge though: a wall :-D |
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ronin
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| Total Posts: 314 |
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@frolloos,
This was a long time ago. More than ten years ago now. Funny how some things don't change.
The real thing would actually be pretty toxic to hedge. There is a gamma singularity at the strike. The closer you are to the strike, the higher your absolute delta. But the moment you cross, you get high delta in the opposite direction.
Plus, the whole thing is very short vega. If you drift away from the strike, the option is as good as dead. So it's like a range accrual on steroids, with a cliquet feature added on top. Yummy.
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"There is a SIX am?" -- Arthur |
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chiral3
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| Total Posts: 5058 |
| Joined: Mar 2004 |
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| Sounds like a Dreamer Option. |
Nonius is Satoshi Nakamoto. 物の哀れ |
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Strange
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| Total Posts: 1410 |
| Joined: Jun 2004 |
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| A 50 year insurance hedge. It had all sorts fun risks. |
I don't interest myself in 'why?'. I think more often in terms of 'when?'...sometimes 'where?'. And always how much?' |
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Osiris2
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| Total Posts: 16 |
| Joined: Sep 2017 |
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Then:
a tranched debt product where the underlying assets were put options sold on various commodities (mostly metals as I recall, although some ag as well.) And it was rated. And the AAA had a spread to TIPS while the rest of the notes were to Libor.
Now:
A securitization of fractional equity in owner-occupied, single family homes. |
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polysena
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What is exactly a fractional equity? Does it have to do with retention requirements?
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Свобода - это то, что у меня внутри.
(Ленинград и Кипелов - "Свобода")
Кому то очень больно, а кому то заебись (Серебряная свадьба) |
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Cheng
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| Total Posts: 2853 |
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A 50 year insurance hedge. It had all sorts fun risks.
Isn't that your good ol' 1980s A&E insurance police?  |
"He's man, he's a kid / Wanna bang with you / Headbanging man" (Grave Digger, Headbanging Man) |
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Osiris2
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"What is exactly a fractional equity? Does it have to do with retention requirements?"
It's like I have a subordinated lien on your home vs. some participation in the value of the property, but no contractual debt instrument.
I give you some money and in return I get some amount of the value when you sell or refi. |
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Osiris2
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| Total Posts: 16 |
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deeds
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| Total Posts: 391 |
| Joined: Dec 2008 |
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Just finished valuation of elements of a deal for OTC traded company
- senior secured convertible bond, among other unusual features, had to isolate the value of the following
-- interest resets annually based on level of stock price relative to conversion price
-- change of control redemption right w make-whole premium from table in 8-K based on stock price / conversion price ratio
- Option over those same notes
-- exercise price payable in mixture of stock and cash determined by holder, with fixed stock divisor determining number of shares in stock consideration
A GS special...i thought i might have seen something like this once before, but can't put my mind's hand on it...anyone seen this kind of thing?
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ronin
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| Total Posts: 314 |
| Joined: May 2006 |
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That's surely just some vanilla calls, with a layer of callability on the entire structure?
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"There is a SIX am?" -- Arthur |
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