In our March 2010 issue we discussed the increasing prevalence of volatility overlays in structured products. Investor participation in the growth/loss of the underlying investment decreases as volatility goes up and increases as volatility goes down. This results in a lower product costs as the issuer does not have to bear the cost of hedging when volatility is high, and therefore costly.
Comparing volatility overlays
It should come as no surprise that not all volatility overlays are equal
