Nonlinear payoff derivatives

[MrMuppet]

Ok, but do you know of any structured note that embeds an exotic option(e.g like a lookback option) and is available at retail?

Look at the German certificate and warrants market. Most of the stuff is so insanely complex that it's illegal in most other countries but there they sell it to grannies.
There are millions of different structures. If you can imagine it, you can trade it...no ISDA required.
You won't be able to trade these if you're from the US and you cannot short them, but besides that you'll find an Eldorado of opportunities

 

[MrAgi1]

Look at the German certificate and warrants market. Most of the stuff is so insanely complex that it's illegal in most other countries but there they sell it to grannies.
There are millions of different structures. If you can imagine it, you can trade it...no ISDA required.
You won't be able to trade these if you're from the US and you cannot short them, but besides that you'll find an Eldorado of opportunities

Thanks. This was informative.

 

[newwurldmn]

Options are the only derivative instruments I know of that have an asymmetric payoff(risk is capped). Other derivatives and asset classes I know of typically have theoretical unlimited gain/loss potential(payoffs are typically a straight line).

Is there any other derivative or asset with a unique or non linear payoff?

bonds

 

[Overnight]

bonds

No shit. The 2 year is now yielding +4%. So why not put a chunk of change into that for a risk-free yield gain? A 2-year lock-up is not so bad considering what the stock market has done for the past two years. Two years looking forward? Good lord.

 

[MrMuppet]

No shit. The 2 year is now yielding +4%. So why not put a chunk of change into that for a risk-free yield gain? A 2-year lock-up is not so bad considering what the stock market has done for the past two years. Two years looking forward? Good lord.

I think he was talking about bond convexity than terminal payoff

 

[MrAgi1]

bonds

You mean bond payoffs are non-linear?

 

[MrMuppet]

You mean bond payoffs are non-linear?

The beautiful world of bond math^^
The relationship between price and interest changes is not linear. Can have positive convexity (non-callables) or negative convexity (preferreds)

 

[MrAgi1]

The beautiful world of bond math^^
The relationship between price and interest changes is not linear. Can have positive convexity (non-callables) or negative convexity (preferreds)

Well that is confusing. I would have to do some studying on that subject.
I came across the attached picture from a website, it shows the payoff as a flat straight line for bonds. Is there something I am not understanding here?

 

[MrMuppet]

Well that is confusing. I would have to do some studying on that subject.
I came across the attached picture from a website, it shows the payoff as a flat straight line for bonds. Is there something I am not understanding here?

you're looking at terminal distributions, not at the movements in bond price as a result of interest rate changes.

First step:
https://www.investopedia.com/articles/bonds/08/duration-convexity.asp

 

[MrAgi1]

you're looking at terminal distributions, not at the movements in bond price as a result of interest rate changes.

First step:
https://www.investopedia.com/articles/bonds/08/duration-convexity.asp

Ok those are 2 different things. Got it.