Volatility as an Asset Class

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Volatility as an Asset Class

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With the recent steep rise and many changes in the field of volatility in the capital markets, exchanges across the world are planning to increase volatility trading. Volatility as an Asset Class brings together the best techniques from both academics and practitioners at an important time.

There are now volatility, corridor and covariance swaps, as well as gamma and correlation trades available. The market for these contracts is expected to grow exponentially over the next few years. In fact it is quite possible that they will grow almost as quickly as the credit derivatives market, which means that the market desperately needs such a comprehensive reference guide.

Written from the practitioner’s perspective, but with important academic contributions, this book is wholly devoted to the trading of volatility as an asset class. This guide covers:
- Trading of volatility and related issues (eg, measurement, forecasting, modelling and hedging)
- 3rd generation volatility products including volatility, variance, gamma and correlation swaps
- How volatility can be measured, what it means, and how it can be used
- Reviews the market and compares volatility and fixed income asset classes
- Shows how to build volatility surfaces
- Examines the reliability of the VIX and describes the VIX and other CBOE-traded volatility products
- Pricing and hedging variance swaps
- Trend following in terms of a volatility strategy
- How the models are calibrated to the market.
This book is recommended reading for traders, risk managers, hedge fund managers, front-, middle- and back-office personnel and software designers, or anyone looking to take advantage of this market.
Introduction

Israel Nelken

Super Computer Consulting, Inc

SECTION 1: NOVEL USES OF VOLATILITY, IN A TRADITIONAL FRAMEWORK

1 Building Implied Volatility Surfaces from the Available Market Quotes: A Unified Approach

Antonio Castagna; Fabio Mercurio

Banca Profilo; Banca IMI

2 Shedding Light on Alternative Beta: A Volatility and Fixed Income Asset Class Comparison

David E. Kuenzi

Glenwood Capital Investments, LLC

3 Trend Following as a Long Volatility Strategy

Patrick Kremer; Hari P. Krishnan; Marc Malek

Conquest Capital Group LLC; Heptagon Capital; Conquest Capital Group LLC

4 Basket Volatility and Correlation

Matthias R. Fengler, Kay F. Pilz, Peter Schwendner

Sal. Oppenheim Jr&Cie. Frankfurt am Main, Germany

5 Rethinking Volatility in the Era of Markov Processes, Fractal Geometry and Guided Random Walks

Peter Krause

Krause Financial Systems

SECTION 2: THE VIX

6 Construction and Interpretation of Model-free Implied Volatility

Torben G. Andersen; Oleg Bondarenko

Kellogg School of Management, IL; University of Illinois at Chicago, IL

SECTION 3: NEW PRODUCTS RELATED TO TRADING VOLATILITY

7 Second-Generation Volatility Products

Nicolas Mougeot

Deutsche Bank

8 Exchange-Traded Volatility: CBOE and CFE VIX and Variance Derivatives

John Hiatt, Catherine Shalen

CBOE

9 Investment Strategies Using the Volatility Index (case study of the Korean market)

Chul Min Kim

Hyundai Securities

10 Risk Premium, Pricing and Hedging for Variance Swaps

Srdjan D. Stojanovic

University of Cincinnati

11 Corridor Variance Swaps

Peter Carr; Keith Lewis

Bloomberg/NYU; KALX, LLC
Israel Nelken is president of Super Computer Consulting, Inc. in Northbrook, Illinois. Super Computer Consulting Inc. specialises in complex derivatives, structured products, risk management and hedge funds. He holds a PhD in computer science from Rutgers University and was on the faculty at the University of Toronto. Israel’s firm has many consulting clients including several regulatory bodies, major broker-dealers, large and medium sized banks as well as hedge funds. He is a lecturer at the prestigious mathematics department at the University of Chicago and teaches numerous courses and seminars around the world on a variety of topics. Israel’s seminars are known for being non-mathematical. Instead they combine cutting edge analytics with real world applications and intuitive examples. He is a member of the Chicago Board Options Exchange New Products Committee.