2004June_BOE_structured_notes.pdf
Hedging and taking risk are the essence of financial markets. A relatively little known mechanism through which this
occurs is the market in structured notes, which have embedded derivatives, some of them very complex.
Understanding these instruments can be integral to understanding the underlying derivative markets. In some cases,
dealers have used structured notes to bring greater balance to their market risk exposures, by transferring risk
elsewhere, including to households, where the risk may be well diversified. But the positions arising from structured
notes can sometimes leave dealers ‘the same way around’, potentially giving rise to ‘crowded trades’. In the past
that has sometimes been associated with episodes of market stress if the markets proved less liquid than normal
when faced with lots of traders exiting at the same time. |
