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Equity, commodity and interest rate volatility derivatives

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  • Balbás, Alejandro
  • Blanco, Iván
  • Navarro, Eliseo

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.

Suggested Citation

  • Balbás, Alejandro & Blanco, Iván & Navarro, Eliseo, 2013. "Equity, commodity and interest rate volatility derivatives," IC3JM - Estudios = Working Papers id-13-02, Instituto Mixto Carlos III - Juan March de Ciencias Sociales (IC3JM).
    • Handle: RePEc:cte:imrepe:id-13-02
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    References listed on IDEAS

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    1. Ogryczak, Wlodzimierz & Ruszczynski, Andrzej, 1999. "From stochastic dominance to mean-risk models: Semideviations as risk measures," European Journal of Operational Research, Elsevier, vol. 116(1), pages 33-50, July.
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