OTC (Over the Counter) equity derivatives actually service a broad section of investors. This encompasses everyone from insurance companies, to hedge funds, to pension funds, to banks, to sovereign wealth funds, to corporations, to the public sector, to asset-managers, and more. This blog post looks at the market for OTC equity derivatives as one which is global. This is because there has been a simply incredible growth in the OTCED marketplace over the last ten years or so. This is growth that shows absolutely no signs of slowing down either.
So, what is it about OTC equity derivatives that is really taking off? There are actually several factors that have brought this progression about. The flexibility in relation to product design and the private nature of this market have really helped it to thrive. This has allowed equity derivatives to be used as portfolio diversification options, as risk-management tools, as an attempt to outperform benchmark indices and to hedge the issuance of equity-related financial products. As you can see; the potential for equity derivatives of an over the counter nature are vast. Because of this they appeal to various investors, which backs up the earlier point about them servicing everyone from asset-managers to insurance companies.
One must also consider the fact that equity derivatives on the exchanges are very limited. There are indeed a substantial number of products that are unavailable on the exchanges to begin with. And even those that are available tend to be very restricted in terms of strike ranges, size and tenor. As a resulted, this becomes another factor as to why OTC equity derivatives are become more plentiful. They allow the transactions to be tailored in order to meet the specific needs of the end users’. Thus, they essentially take away all of the limitations that are associated with equities on the exchanges.
As mentioned in the introduction, the growth of OTCEDs is something that is well and truly taking place on a global scale. Products are actively trading all over the world. This encompasses everywhere from Asia-Pacific to America to Europe. Nonetheless, statistics show that it is Europe who is leading the way. They boast over half of the global market for over the counter equity derivatives. However, the United States also holds a big proportion with over a quarter of the market, whilst Japan comes in third with approximately seven per cent. Many reports have predicted that these figures are set to grow steadily on an annual basis and thus one can safely say that there is no sign of the market for OTC equity derivatives slowing down.
When you take everything into account and all of the benefits associated with this type of equity derivative, it is not hard to see why it is flourishing at the moment. This private exchange offers customisation and flexibility and therefore the potential is huge; hence why so many different types of investors, from asset managers to insurance companies, all over the world are capitalising on this booming marketplace.
What will you benefit from if you utilise a company for derivatives consulting?
In finance, it is fair to say that one term which brings about a lot of confusion is ‘derivative’. A derivative is essentially a financial contract that uses the performance of the entity i.e. the asset, interest rate, or index to determine the value. The most basic example is a mortgage, be it for an HDB, falt, or any other property. These are referred to as the ‘underlying’. There are two types of derivatives. You have those that are deciphered by the exchanges and then there are over the counter derivatives. These are private contracts that are customised by the parties involved. The latter is becoming more and more popular as people prefer the flexibility and greater level of control provided. However, no matter what type of derivative an investor engages in it is always recommended to seek some form of derivatives consulting. This is especially the case if you are new to this type of investment.
Companies offering derivatives consulting will be able to provide you with advice and assistance on a various number of features related to the derivative in question. Firstly they will be able to provide you with help when it comes to structuring legal documentation, such as ISDA legal documents. In addition to this, there are a lot of derivative consulting companies who have professional negotiators on hand to help you get the most from your agreement. Furthermore, they will be able to provide you with advice in relation to risk management. This includes; how various model risks should be grouped, what risks ought to be hedged, how limits can be set, how to manage the risks that cannot be hedged, and so on and so forth. They will also be able to review any existing systems and procedures. And that is without even mentioning their assistance in the form of providing advice on pricing and modelling derivative products. This encompasses determining what parameters should be used and models are suitable. As you can see; derivatives consulting covers a fast array of topics and services. It is highly recommended to guarantee that everything runs smoothly and you get the most favourable terms from the deal.
Nonetheless, if you are going to make use of this service then it is extremely important to make sure you pick the company wisely. Experience is highly imperative. You want to go for professionals who have provided this service time and time before. You will also need to look out for qualifications and training. It is always recommended to ensure that the company has specific training and thorough knowledge in relation to your specific type of financial product. In addition to this, it is always an advisable idea to read reviews that have been left by previous clients. This is the best way to get an honest insight into the level of service provided.
To summarise, the industry for financial derivatives is a crucial one yet often a confusing one too. To ensure that everything is handled as it should be and to guarantee that you get the good end of the bargain it is always recommended to take advantage of the derivatives consulting service offered by many companies today.