Japanese corporates have started entering collars in the last month to hedge positions in the sinking Tokyo equity market in preparation for the introduction of mark-to-market accounting in September. "Before they were just buying puts, now they're buying collars," said Jim Clark, head of equity trading at UBS Warburg in Tokyo. He continued that because of low market levels, corporates are nervous and are hedging against further downside with puts. If stocks rise, the calls could be executed, but Clark said corporates are happy to unwind cross holdings at higher than current market levels, because selling the calls partly offsets the cost of buying the puts.
Mark O'Friel, head of equities at Morgan Stanley in Tokyo, expects volumes for trades to increase dramatically after the new accounting rules come into play. The size and specifics of such transactions vary, as do the size of clients' holdings. He declined to elaborate.
One trader said purchasing collars is part of a longer-term trend to hedge cross holdings sparked off by the slide in the Nikkei from 14,556 in May to 12,163 last Wednesday.
