UBS Warburg is pushing money managers, particularly insurance companies and pension funds, to "think outside of the asset class" when looking at equity derivatives strategies. James Kelly, managing director in risk management products in London, said if one sector, for example equities, falls, this often leads to a move in funds to other areas, in this case bonds. This asset allocation tactic should be transferred to the derivatives arena, according to Kelly.
An example strategy to protect against a fall in equities and finance it, would be for an investor to sell an equity call, but this caps the upside. Alternatively, an investor could sell a put on government bonds to finance buying an equity put. If equities fell due to a rise in interest rates, then the bond option would be in the money and the purchase of bonds could be funded by the payout on the equity put.
