Financial Risk Manager Part 2
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The manager of the equity trading desk of an investment bank is presenting to a group of newly hired analysts on complex derivatives the desk uses to take positions on equity correlations. The manager discusses characteristics and uses of rainbow options, quanto options, and correlation swaps, and demonstrates how the payoff of each product can be modeled with examples that use the Dow Jones Industrial Average as the underlying asset for each instrument. Which of the following statements could the manager correctly make during the presentation?
A
The payoff for each of these products is highest when the price movements of the underlying assets are uncorrelated.
B
Investors can take a synthetic long position in equity correlation by buying put options on an equity index and selling put options on the components of that index.
C
The payoff for the correlation buyer in a correlation swap is negative if the realized correlation of the underlying assets is higher than the fixed correlation in the swap.
D
The trader known as the London Whale created large losses by continuing to purchase index swaps even when losses from earlier positions continued to increase.