Publication: Equity, commodity and interest rate volatility derivatives
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2013
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Abstract
A new methodology to construct synthetic volatility derivatives is presented. The
underlying asset price process is very general, since equity, commodities and interest
rates are included. The focus is on volatility swaps and volatility swap options, but
much more derivatives may be considered. The proposed methods optimize the conditional
value at risk of the non-hedged risk, and yields both bid and ask prices, as
well as optimal hedging strategies for both purchases and sales. Upper bounds for the
broker capital losses under very negative scenarios are given. Numerical experiments
are presented so as to illustrate the performance in practice of this new approach.
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Keywords
Incomplete and imperfect market, Risk measure, Volatility derivative, Commodity, Interest rate