Impact of Structured Products on Volatility Market

The introduction and increased issuance of structured products, such as derivatives, have had a significant impact on the volatility market. As interest rates rise, structured products offer the opportunity to earn yields from bonds while also taking market exposure through derivatives. This increased appeal of structured products, combined with higher interest rates, has led to a compression of volatility, particularly in equity indexes. The banks issuing these structured products find themselves in a long volatility position, which they have to offset by selling volatility back into the market. This trend has resulted in increased volatility compression and has made structured products more desirable in comparison to traditional market exposure.