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- Volatility Derivatives 1
- The world of Structured Products 4
- Library of Structured Products 0
- Table of Contents
- Vanilla Options
- Volatility, Skew and Term Stru
- Option Sensitivies: Greeks
- Option Strategies
- Correlation
- Dispersion Options
- Barrier Options
- Digitals
- Autocallable Structures
- The Cliquet Family
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- Variance Swaps /
- The Market /
- Development
Development
Birth:
- first mentioned in th 1990's
- only really took off following dvlpmt of robust pricing models through replication arguments
Growth:
- grown steadily --> investor demand to take direct volatility exposure without cost/complexity delta-hedging options.
Liquidity:
- has increased
- VS levels now deviate from theoretical price obtained from replicating ptf of options
--> partly because construction of replication ptf includes a relatively large contribution from deep OTM options and their reduced liquidity gives rise to some discrepancy in the overall pricing of VS.
- bid/offer spreads have come in significantly over recent years --> this trend should continue as liquidity still improving.
- bid/offer ~ 0.5 vegas on indices in developed markets
- bid/offer ~ 1-2 vegas on liquid single-stocks
- spreads are naturally higher in emerging markets
- most liquid generally from 3m to 2y, although indices and liquid stocks have VS to 3y-5y and beyond
- is concentrated on equity markets --> IBs need to recycle volatility and correlation exposures from structured products
Maturities generally coincide with the quarterly options expiry dates.
This means that they can be efficiently hedged with exchange-traded options of the same maturity.
Volatility Indices: VIX, VSTOXX, VDAX, ...
- represent the theoretical prices of 1m variance swaps
- are calculated by the exchanges from listed option prices, interpolating to get 1m maturity.
- are widely used as benchmark measures of equity market risk.
Typical Sizes:
- € 100k – €200k vega notional for indices
- € 50k vega notional for single-stocks
Forward variance and index variance spreads (ex: SX5E vs. SPX) are increasingly quoted with a single bid/offer spread, often comparable to, or only slightly higher than, the spread on a single leg, meaning the second component of the spread can effectively be traded at mid-market levels.
More recently, the investor base has widened further with the advent of structured products which embed variance swap returns. Such products may be leveraged and/or offer capital guarantees, making them attractive to a broader range of institutions including private banks and sophisticated private investors.