Dumping losing derivatives positions may not be the best course of action for investors looking to change the risk profile of their portfolio, according to Heinz Binggeli, managing director with Emcor, a consulting and money management firm in Irvington, N.Y.
Particularly in the area of structured notes, where getting full value in a sale may be difficult, managers might take a different tack, Mr. Binggeli said.
An inverse floater, for example, which pays a lower coupon as interest rates rise, may fetch less in a sale than swapping out of that floating interest payment. In theory, there shouldn't be much of cost difference, but in practice it's generally cheaper to swap out of a structured note rather than sell it, he said.
Dealers will offer new swaps at prices that are better than buying back existing structured notes, said Mr. Binggeli.
Although there isn't a hard and fast rule regarding structured notes and other derivatives, because individual situations vary, investors shouldn't sell "without looking at alternatives," Mr. Binggeli said.
Trading volume this year at futures exchanges is up significantly from the previous year, with volume on the London International Financial Futures and Options Exchange already ahead of trading for all of 1993.
In futures and options contracts, LIFFE volume through August totaled 108.9 million, compared with only 101.9 million for the entire year of 1993, a rise of 75%, according to LIFFE tabulations.
A spokeswoman for the London-based exchange said LIFFE's Italian futures and options are among the exchange's fastest growing contracts.
Volume in the three-month Eurolira future rose 232% to 2.406 million contracts from January through August, compared with 724,913 contracts in the same period in 1993. Trading was also up more than 200% for each of Italian government bond futures, with contract volume of 8.898 million, and options, with volume of 801,019.
Volume also climbed for January through August in LIFFE's German government bond contract, rising 117% to 26.8 million. LIFFE's three-month Euromark contract, and its U.K. Long Gilt contract, rose 48% to 21.2 million, and 111% to 14.5 million, respectively, compared to the same period last year.
Other exchanges also reported significant increases in volume for the same period. The Chicago Board of Trade reported an increase of 34.5% on volume of 154.3 million contracts; the Chicago Mercantile Exchange saw an increase of 55.4% on volume of 149.9 million; and the Sydney Futures Exchange in Australia had an increase of 51% on volume of 21.3 million.
Included in the CME's volume reporting method this year is anything that creates or liquidates open trading positions, such as the expiration of an option on a future. This change in reporting accounts for part of CME's increase.
In Sydney, more than 8% of the exchange's volume was done outside of Australia's normal trading hours, coming through SFE's after-hours screen-based market, according to a statement issued by the exchange.