Interest Rate Derivatives

Similarities and Differences of the Volatility Smiles of Euro-Bund and 10-year T-Note Futures Options
This paper compares the behavior of the volatility series implied by options using daily settlement prices of Euro-Bund and 10-year T-Note futures options from January 2nd, 2002 to October 3rd, 2008. We examine the statistical similarities and differences of the volatility smiles of the two products in terms of several descriptive observables, such as 30-day ATM (at the money) implied volatility, 30-day ATM implied volatility skewness and kurtosis. We find that in general the volatilities of the two products move together over time in terms of level, skewness, and kurtosis. However, the 30-day ATM implied volatility of Euro-Bund futures options is on average lower than that of 10-year T-Note futures options. We also find that the difference of the two volatility series is negatively correlated to the difference of short-term interest rates in the U.S. and Euro-Zone, but positively correlated to the difference of term structure spreads in the U.S. and Germany over time. This is consistent with the notion that from an investor\'s point of view price changes of bonds with different maturities and coupons depend not only on the expected change in future interest rate but also on the uncertainty of expected movements.

Eurex Derivative Products in Alternative Investment - The Case for Managed Futures
This report provides an update on the potential benefits of incorporating Eurex futures contracts in CTA programs. In a previous report it was shown that incorporating Eurex futures contracts in trendfollowing programs would have improved the performance of CTAs employing those trading techniques over the period 1992-2002. This report covers the period 1992-2005. Results show that the Eurex futures contracts continue to provide the benefits illustrated in the previous report. Results also show that these strategies would have improved returns and lowered volatility for an investor holding a typical stock/bond portfolio. Although global equity indexes are highly correlated the returns from momentum strategies employed in these markets are surprisingly different. In particular, a 40% allocation to Eurex futures contracts would have resulted in similar volatility levels as an equity portfolio with a 200 basis point increase in annualized returns.

Replicating Hedge Fund Returns Using Futures - A European Perspective
Hedge funds tend to put a lot of effort into generating their returns and charge substantial fees to do so. However, with the latest performance evaluation studies indicating that hedge fund performance is not truly superior (anymore), the question arises whether it is possible to generate similar, hedge fund-like, returns in a more mechanical way and with less effort. In other words, is it possible to design dynamic trading strategies, mechanically trading stocks, bonds, etc., that generate hedge fund-like returns? If such strategies indeed exist, then this would solve a respectable number of problems surrounding hedge fund investments and alternative investments in general, including the need for extensive due diligence, liquidity, capacity, transparency, style drift and regulatory problems, as well as excessive management fees. In this paper we develop and demonstrate the workings of a technique that allows the derivation of dynamic futures trading strategies, which generate returns with statistical properties similar to hedge funds. Trading nothing else than Eurex DAX 30 and Euro Bund futures, we show that this technique is not only capable of replicating fund of funds returns, but is equally capable of replicating individual hedge fund returns. Accurately replicating the risk-return profile, but sharing none of the drawbacks of real hedge funds, our synthetic hedge fund returns are a worthwhile alternative to direct hedge fund investment.

From Delivering to Packaging of Alpha - Illustration from Active Bond Portfolio Management: Using Fixed Income Derivatives to Design Hedge Fund Type Offerings that Better Fit Investors\' Need
In this paper, we emphasize the need for the hedge fund industry to adopt a consumer (investor)-driven approach, as opposed to the current producer (manager) perspective, and we call for the emergence of new types of offering with characteristics better suited to the needs of institutional investors. Using active bond portfolio management as an example, we present evidence that derivatives can be used by managers not only for generating and delivering abnormal performance, but also for packaging such performance in a form that is consistent with the modern core-satellite approach to institutional portfolio management, for which we explore both a standard static version and also a dynamic extension allowing for dissymmetric control of active management risk.