Volatility – Risks and chances

Volatility is a highly cited term for market risks. Each and every trader experiences the effects of volatility on a daily basis, making understanding volatility and what it is all about an absolute must for them. Chances and risks are two sides of one coin, because by deliberately integrating volatility into ones trading strategy, one can also exploit its opportunities.
Volatility is a measure for the fluctuation range of a security, a currency or an index and is one of the most important parameters for the price development of an option. Professional investors work intensely with the expected fluctuations of the market, as future price movements decide on profit or loss. High volatility means prices are fluctuating strongly. The higher the expected fluctuation, the higher the likelihood, that the option develops in the investors favor and that a higher price has to be accepted for the particular option. With only low price fluctuations "Vola" goes down as does the price of the option that goes with it.

A distinction is made between historical and implied volatility.
Historical volatility is calculated on the past prices of an underlying asset. It is about the average fluctuation rate of prices, e.g. a stock or an index during a defined time period in the past. The implied volatility is the volatility expected by the market and included in the current price of the option. Is the implied volatility, i.e. the expected fluctuations above the historical volatility, the option will be somewhat more expansive compared to the theoretical price derived from the option-price theory.

Barometer for volatility
Certain indexes are considered barometers for volatility. For example, the VDAX® indicates the implied volatility of the leading German index DAX® over a time period of 45 days in percentage points. A high figure point to an unruly market, whereas lower figures give reason to expect a development without heavy price fluctuations. It does not however give any hints on the direction of the changes, whether they will be rising or falling values.
The VSTOXX® is the benchmark index for the volatility of the European stock market, showing the percentage of the expected volatility in the upcoming 30 days for the EURO STOXX50® Index.

Investment strategy: turning uncertainty into chances
In market phases like the current developments on the stock markets, the implied volatility is interesting as an asset class of its own. A review shows that in the past volatility often showed a strong negative correlation to the stock markets, implying: falling stock markets mean rising volatility and rising prices lead to less variability.
Almost simultaneously with the falling prices of the European exchange barometer, the VSTOXX®, for example, rises. A direct investment into volatility can therefore effectively be used to diversify a portfolio and also as a safeguard against market shortfalls.
Eurex Exchange offers futures and options on the VSTOXX®, the European benchmark for volatility on the stock market. These products offer precise instruments for investors with a leverage effect to engage in European volatility, providing a simple opportunity to reproduce the expected fluctuation margin of the European stock market in your securities account and to profit from rising volatility.

Cloud Computing – cloud with guaranteed silver lining?

Experts speak of “completely new rules”, the “biggest shift of paradigms in the last 20 years“, and „enormous cost saving effects“, when they talk about Cloud Computing. But what is really behind this term and what does it mean for the financial industry, especially for exchanges?

“Cloud Computing” means that storage space, computational power, programs and other computer-aided services are no longer being stored on your own local computer, but are available as an internet service. The term “Cloud“ is derived from technical schematics of this service, in which each single service is drawn as a circle and together they form the symbol of a cloud.
Centrally available, highly standardized and virtualized computing and storage resources as well as the latest web technologies are the base of Cloud Computing. All services are scalable „on demand“ and are charged according to the actual usage. There are different service and operating models. Operators are able to offer favorable conditions, by using economies of scale and rent then out their IT services and systems multiple times. For the users this means: no capital commitment or investment, because they decide how much capacity they want to use. Additionally, the capacity can be adjusted at any time to their actual needs.

The financial industry will profit the most from Cloud Computing
At least according to the Centre for Economics and Business Research (CEBR) "2011 Cloud Dividend Report". It forecasts advantages of up to 58.5 billion euro until 2015, if – and this is a big “IF“ - the "market adaptation of Cloud Computing continues as expected".
The analysts see banks and financial services as the fastest adapters to Cloud Computing. In the next five years, they estimate that 60 to 80 per cent of the companies in this sector will implement Cloud Computing. This is due to financial savings and the support of secure data exchange between European banks provided by the new technology. Most of all it is expected, that time-to-market for new products from banks, financial service providers and insurances will be much shorter with Cloud Computing.

What special requirements have to be considered while using the new technology in the financial sector?
Of special importance will be the question of the access rights to the data stored in clouds. Furthermore, safety aspects can not only be limited to the question if data can be safely and securely stored in the clouds but also to the possibilities of limiting the access to sensible data to authorized persons only. Additional efforts will be needed to manage Clouds effectively. Preventing methods against possible data leaks through mobile devices, e.g. Smart phones, also need to be found. To combat this, it is recommended that companies should integrate these devices into their own IT infrastructure.

These few points indicate already, that there are many specific safety aspects that need to be taken care of by the financial industry – considering the importance of this sector for the general economy.

Due to these uncertainties Deutsche Boerse Group has decided that an active usage of the cloud is out of the question for the time being. Therefore our gateways will block every respective access from the Intranet, e.g. Dropbox and Amazon S3 or Google Drive.