Archive for the ‘Hedging’ Category

Volatility as an Asset Class

14 Mar

Article by: Julien Lascar
Published by: Societe Generale Corporate & Investment Banking
Date: Jun 2012

This is a presentation on volatility, tail hedging, and alternative investments given at the Asian Insurance Forum.

Full article (PDF): Link


Time-changed Levy processes and option pricing

12 Mar

Article by: Peter Carr, Liuren Wu
Published by: Journal of Financial Economics
Date: 5 Aug 2002

“The classic Black-Scholes option pricing model assumes that returns follow Brownian motion, but return processes differ from this benchmark in at least three important ways. First, asset prices jump, leading to non-normal return innovations. Second, return volatilities vary stochastically over time. Third, returns and their volatilities are correlated, often negatively for equities. Time-changed Levy processes can simultaneously address these three issues. We show that our framework encompasses almost all of the models proposed in the option pricing literature, and it is straightforward to select and test a particular option pricing model through the use of characteristic function technology.

Full article (PDF): Link

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Posted in Hedging


Pricing Methods and Hedging Strategies for Volatility Derivatives

28 Feb

Article by: H. Windcliff, P.A. Forsythy, K.R. Vetzal
Published by: The Journal of Derivatives
Date: 4 May 2003

“In this paper we investigate the behaviour and hedging of discretely observed volatility derivatives. We begin by comparing the effects of variations in the contract design, such as the differences between specifying log returns or actual returns, taking into consideration the impact of possible jumps in the underlying asset. We then focus on the difficulties associated with hedging these products. Naive delta-hedging strategies are ineffective for hedging volatility derivatives since they require very frequent rebalancing and have limited ability to protect the writer against possible jumps in the underlying asset. We investigate the performance of a hedging strategy for volatility swaps that establishes small, fixed positions in straddles and out-of-the-money strangles at each volatility observation.”

Full article (PDF): Link

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Posted in Hedging, Trading ideas


Volatility ETNs: A Viable Hedging Instrument

12 Jun

Article by: Oliver Schwindler
Published by: Seeking Alpha
Date: 18 May 2011

“Despite the controversial discussion about ETNs focused on volatility, these instruments have caught a lot of interest from investors. However, it’s difficult to judge whether it’s mainly retail investors with a buy and hold approach or traders using these instruments for short term trading/hedging or even sophisticated investors like hedge funds who invest/trade these instruments.

“In my view the biggest critique seems to be the fact that both ETNs – iPath S&P 500 VIX Short-Term Futures ETN (VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ) – are constantly loosing value. I will present a quick study which clearly shows that these ETNs are viable hedging instruments even for a traditional buy and hold investment approach.”

Full article: Link

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