Theta

Theta measures the sensitivity of the portfolio value to change in time, assuming all other factors remain constant. Both indices exhibit positive Theta, with the FTSE 100 at 0.9913 and the Nikkei 225 slightly higher at 1.0324. Positive Theta indicates that, on average, structured products linked to these indices benefit from time decay, which is typical for yield-generating products such as autocalls and income paying structures.

The marginally higher Theta for the Nikkei 225 despite a lower total notional suggests that time decay is stronger for Nikkei-linked products than FTSE-linked ones. This may reflect differences in product design or maturity profiles.

Dividend Sensitivity

Dividend Sensitivity measures how changes in expected dividends affect product valuations. The FTSE 100 shows a Dividend Sensitivity of -19.248, compared to -16.654 for the Nikkei 225. An increase in dividend will decrease the expected forward of equity underlyings and therefore as seen here, most structured product prices will have an inverse relationship with dividend changes as they have a positive Delta to the underlying. This is typical for longer dated products.

Position Vanna

Vanna is a second-order options Greek that shows the sensitivity of an option’s Delta to changes in implied volatility. It captures the interaction between Delta and Vega and shows how shifts in volatility affect Delta.

The FTSE 100 index has a position Vanna of 41.14 which is 2.7 times the Nikkei 225’s position Vanna of 15.17. This means the FTSE 100 position Delta is much more sensitive to changes in implied volatility than the Nikkei 225’s.

Part of this difference can be explained by the larger position delta of the FTSE 100 and the higher overall notional. However, these factors do not account for the full difference in position Vanna.

While the raw Greeks help explain the mechanical sensitivities of the portfolios, a major driver behind these differences is the composition of the product universe itself.

In the universe of eligible products, 63% of FTSE 100 index structured products are linked to the index as a single underlying. In contrast, only 6% Nikkei 225 index products are single index leaving 94% of the products referencing the Nikkei 225 as part of a worst-of basket, typically alongside two or three other equity indices. This distinction is crucial to understanding the aggregate Greeks.

A single underlying autocall or income structure is highly sensitive to movements in that index. Changes in level, volatility, dividends and time all directly influence the probability of coupon payments, early redemption and capital protection. This naturally produces higher Delta, Vanna, Charm and Dividend Sensitivity at a portfolio level.

Worst-of structures behave very differently. Because the payoff depends on the worst performing of three assets, the product can be far less sensitive to movements in any one index. Similarly, changes in volatility or dividends on a single index can have limited impact on valuation because another asset may remain the worst performer. This theme consistently comes out of the calculations performed by FVC that powers this service.

This multi-asset damping effect significantly reduces second-order Greeks such as Vanna and Charm and suppresses overall directional sensitivity. As a result, many of the lower aggregate Greeks observed for the Nikkei 225 are not primarily a reflection of the index itself, but of the overall make-up of Nikkei linked structured products.

Position Charm

Position Charm measures how the portfolio’s Delta changes as time passes. The FTSE 100 has a Position Charm of -1.1617, while the Nikkei 225 shows Position Charm of -0.9675.

Negative charm is consistent with autocallable structures. As time passes and products move closer to observation dates, the probability of early redemption increases and barriers being hit decreases. Therefore Delta typically reduces, producing negative Charm.

Across both parts of this comparison, the aggregate Greeks reveal as much about product design as they do about the indices themselves.

Although the Nikkei 225 is inherently more volatile than the FTSE 100, the FTSE-linked structured product universe shows greater sensitivity across many Greeks because it is dominated by single-underlying autocall and income structures. By contrast, the widespread use of worst-of baskets in Nikkei-linked products suppresses the portfolio sensitivity to this underlying.

The analysis shows that when assessing structured product risk, it is not enough to consider the characteristics of the index alone how the index is used within payoffs is often the more important driver of portfolio behaviour.

Tags: Valuations