Next Level in Risk Management? Hedging and Trading Strategies of Volatility Derivatives Using VIX Futures

Creators: Fahling, Ernst J. and Steurer, Elmar and Schädler, Tobias and Volz, Adrian
Title: Next Level in Risk Management? Hedging and Trading Strategies of Volatility Derivatives Using VIX Futures
Item Type: Article
Projects: ILR
Journal or Publication Title: Journal of Financial Risk Management
Page Range: pp. 442-459
Date: 29 December 2018
Divisions: Wirtschaftswissenschaften
Abstract: The paper analyses how volatility derivatives on the volatility index VIX can be used as trading and risk management tools for investors and traders. Volatility and the dif-ferent types of volatility are discussed. It elaborates upon assumptions of option pric-ing models and specifies which complications accompany the determination of vola-tility. The weaknesses of the Black-Scholes-Merton model are illuminated and the dif-ference between the model assumptions regarding volatility and market reality are identified. Using the skew- and term-curve-effect, the paper demonstrates how volatil-ity behaves in reality towards other model parameters. In terms of pure volatility trad-ing, the volatility derivatives are presented and analysed in terms of their merits and fields of application. Additionally, the stylized facts about volatility are considered. The paper shows how VIX futures and options can hedge equity portfolios and when they are superior to traditional hedging alternatives and compares the outcome of a VIX hedging strategy with a Buy& Hold strategy of the S&P500 index over a time period of 20 years.
Location (print): Open OPAC
Link eMedia: Download
Citation:

Fahling, Ernst J. and Steurer, Elmar and Schädler, Tobias and Volz, Adrian (2018) Next Level in Risk Management? Hedging and Trading Strategies of Volatility Derivatives Using VIX Futures. Journal of Financial Risk Management, 7 (7). pp. 442-459. ISSN 2167-9541

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