INVESTMENT banks yesterday denied they are smarting from losses after a surge in UK share prices caught them short on certain derivative deals for retail investment products.
Insurance companies and other fund management groups which offer stock market-related investment bonds to private investors, have been buying equity call (buy) options from the banks to underwrite their investment products linked to the performance of the FTSE-100 share index.
Market sources say overall losses amount to anything between #50m and #350m, but the banks remain cool to these attempts to put a figure to the alleged losses.
BZW, the investment banking arm of Barclays Bank, declined to comment on market speculation that it has suffered losses.
UBS and BZW figure among a number of banks which have been offering derivative deals for index-related investment products.
The derivatives are bought to protect the fund managers selling the investment product - a type of long-term bond - from losses if share prices rise.
To measure the movement of share prices, the FTSE-100 index is usually chosen as this gives a reading of UK share prices - less dividends - of Britain's 100 biggest companies.
Investment products under this category do not allow fund managers to sell securities - shares and options - that they do not already own and this usually restricts their equity derivatives involvement to buying call options.
In general, a call option allows the buyer to buy shares at an agreed price by a certain date in the future but it is not an obligation to buy the shares. This is in contrast to a futures contract which, if held to expiry, requires the buyer to ''buy'' the market.
Usually, around 30% of the investment amount is earmarked to buy call options. The remainder is used to acquire commercial paper or corporate debt from banks and building societies in order to retain the capital value of the investment. - Reuter
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