Yawn-Inducing Derivatives

Are derivatives getting more boring or is it just me? I remember a conversation I had with a HH about three years ago. He had called me to offer me a corporate equity derivatives marketing position at a reputable bank but as we began to chat we quickly realized that I wouldn´t enjoy it. Why? Because such business involves much more tax & accounting & fiscal stuff than financial or mathematical stuff. In other words, less creativity, more bureacrat-like grunt work. Not for someone who was describing his interest for derivatives as a passion born out of intellectual curiosity.

But the hard cold truth is that the segments of the derivatives business that seem to have been making the most money lately are precisely those that involve a lot of non-financial stuff. Corporate equity derivatives has been a relentless money-maker, riding the coattails of the M&A boom. Tax-driven transactions for multinationals also bring in much tastier P&L than plain vanilla swaps. And what to say of structured finance, where tax, legal, and ratings issues reign absolutely supreme?

Call me old-fashioned, but I enjoy much more those neanderthalish products known as exotic options, interest rate swaps, and volatility derivatives. Products where all that matters is market movements and probability distributions. Finance at its purest. No need for tax expert, laywers, or SPVs when transacting a knock-out call, a quanto swap, or a VIX put. It´s just between the salesperson, the trader, and the client. It´s just determined by market variables. No need to bring in Hans the legal guru or Tommy the Caymans paralegal. And certainly no need to ring in Laura from S&P.

I have plenty of credit derivatives books and I have plenty of exotic options tomes. Inevitably, I continue to tend to reach for the latter and to shun the (yawn-inducing) former. I know that in doing so I am cutting myself off from the hottest stuff, and iredeemably locking myself up in oldies territory, but I can´t really help it. I am afraid that I will always find much more attractive the behaviour of the vega of a reverse KO than the build-up of a CDO squared.

ptriana@profesor.ie.edu