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Equity, commodity and interest rate volatility derivatives

  • Alejandro Balbás


  • Iván Blanco


  • Eliseo Navarro


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    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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    Paper provided by Universidad Carlos III, Instituto sobre Desarrollo Empresarial (INDEM) in its series Business Economics Working Papers with number id-13-02.

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    Date of creation: Sep 2013
    Date of revision:
    Handle: RePEc:cte:idrepe:id-13-02
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    5. Ho, Thomas S Y & Lee, Sang-bin, 1986. " Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, vol. 41(5), pages 1011-29, December.
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    7. R. Rockafellar & Stan Uryasev & Michael Zabarankin, 2006. "Generalized deviations in risk analysis," Finance and Stochastics, Springer, vol. 10(1), pages 51-74, 01.
    8. Peter Carr & Roger Lee, 2009. "Volatility Derivatives," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 319-339, November.
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    11. Balbás, Alejandro & Balbás, Raquel & Garrido, José, 2010. "Extending pricing rules with general risk functions," European Journal of Operational Research, Elsevier, vol. 201(1), pages 23-33, February.
    12. Windcliff, H. & Forsyth, P.A. & Vetzal, K.R., 2006. "Pricing methods and hedging strategies for volatility derivatives," Journal of Banking & Finance, Elsevier, vol. 30(2), pages 409-431, February.
    13. Alejandro Balb�S & Beatriz Balb�S & Raquel Balb�S, 2013. "Good deals in markets with friction," Quantitative Finance, Taylor & Francis Journals, vol. 13(6), pages 827-836, May.
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