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Euro-denominated volatility for euro-denominated risk

Release date: 12 Aug 2013 | Eurex Exchange

Euro-denominated volatility for euro-denominated risk

Mark Shore, author of Eurex Exchange’s new volatility newsletter, is an Adjunct Professor and Board Member of the Arditti Center for Risk Management at DePaul University's Kellstadt Graduate School of Business. Mark founded the consulting/ research firm Shore Capital Management. He is a frequent speaker at alternative investment events and is a contributing writer for a number of publications including Reuters HedgeWorld and Micro-Cap Review. Mark graduated from DePaul University with a degree in Finance and holds an MBA from the University of Chicago. He spoke with Eurex Exchange about how VSTOXX products fit a market need for volatility products that focus on Europe, and thus help a wide variety of investors increase their hedging accuracy.

Eurex: Why is volatility as an asset class growing in importance?
Shore: Simply put, investors are becoming more aware of market volatility and the need to hedge their portfolios. Unfortunately, many learned tough lessons in the equity markets in the mid to recent past in terms of the tech and housing bubbles and ensuing crashes and the more recent sovereign debt crisis. Volatility in itself is both a positive and negative phenomenon; negative volatility forces investors to take notice. I explain it in simple terms by likening it to cholesterol levels. No one pays attention until they approach dangerous territory.

Eurex: What factors will drive the VSTOXX market going forward?
Shore: First and foremost, ongoing market volatility will drive the future development of the VSTOXX market. As awareness of volatility grows, investors are learning that professional traders are not the only market participants that can use volatility products to better hedge. Education plays an important role in this process. While professional traders can and do utilize volatility products to hedge, smaller investors can access many of the same volatility products, including either by directly taking a view with volatility futures or by way of managed accounts. One important way that volatility as an asset class will gain further traction is through continued educational efforts.

Eurex: Are geopolitical developments causing investors to diversify their volatility portfolios?
Shore:
Global markets are increasingly intertwined. However, each market has its own important nuances. For that reason, it is important to hedge European volatility with more correlated European-focused volatility products like VSTOXX Futures. Accurate hedging is an important determinant of its success as insurance. The Sovereign Debt Crisis and national and pan-European policy reactions highlighted the relevance of specific European volatility products.

Eurex: How is Eurex Exchange's new spread matrix encouraging market development?
Shore:
The new spread matrix opens up more availability in terms of spreads; back months are often the more important ones for hedgers who may be active in physical markets. Additional spreads also mean that there is likely less maintenance work (fewer rolls) involved in keeping a hedge on. These developments are not relevant only for professional traders. Rather, they are important for end users of VSTOXX Futures as well because as greater numbers of professionals increase their trading activity in the product, liquidity grows, which is essential for any contract.

Eurex: Can you tell us why readers should sign up to receive the newsletter and what readers can expect going forward?
Shore:
The VSTOXX newsletter is poised to become a destination for a growing body of literature on volatility. Educating our constituency about volatility and how investors can benefit from it is the overarching goal of the newsletter. Going forward, we will cover many different topics related to volatility and to VSTOXX more specifically. They will range from basic mechanics to more advanced strategies. I plan to include interviews with a number of well-respected volatility practitioners in order to provide readers with insights from active users.

For more information please contact:

Markus-Alexander Flesch

Eurex Global Derivatives AG
Sales

Theilerstrasse 1a
6300 Zug

T +41-43-430-71 21

 

 

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