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Jurassic


Total Posts: 152
Joined: Mar 2018
 
Posted: 2018-05-23 21:57
Apparently....
>"Volatility Futures fair price is not equal to forward variance" [1].

I find this weird because effectively the VIX is var swap with truncated wings. Does anyone have a better explanation as to why this is?

> "As the pay-out of a Volatility Futures is linear in volatility, this means it is short volatility of volatility."

Again if I was long VIX futures am I not long variance, hence long volatility of volatility???



[1] http://www.eurexchange.com/exchange-en/about-us/news/colin-bennett-on-volatility-trading-part-3-volatility-futures/2598254

Strange


Total Posts: 1436
Joined: Jun 2004
 
Posted: 2018-05-24 01:18
Well, what's the p&l of a forward variance swap if vol moves 1 point and what is the p&l of a volatility futures?

I don't interest myself in 'why?'. I think more often in terms of 'when?'...sometimes 'where?'. And always how much?'

frolloos


Total Posts: 43
Joined: Dec 2007
 
Posted: 2018-05-24 10:13
>Apparently....
>>"Volatility Futures fair price is not equal to forward variance" [1].

I'm happy to hear that. It would be a bit silly if they were equal.

There is a convexity adjustment in the VIX futures. If you google "convexity adjustment vix futures" you'll have enough to read over the weekend. But it basically boils down to Jensen's inequality.

Jurassic


Total Posts: 152
Joined: Mar 2018
 
Posted: 2018-05-24 21:06
> If you google "convexity adjustment vix futures" you'll have enough to read over the weekend.

Ok will do.

Surely he means volatility futures are short vol of vol of vol though?

frolloos


Total Posts: 43
Joined: Dec 2007
 
Posted: 2018-05-25 02:41
"vol of vol of vol"? you're trying to go too fast chief!

As I said, Jensen's inequality:

vol of vol = E(x) - E(sqrt(x))^2 > 0 because of Jensen's inequality E(sqrt(x)) <= sqrt(E(x)), where x is future realized variance in this case.

Hence, E(sqrt(x))^2 = E(x) - vol of vol, i.e. short vol of vol.

ronin


Total Posts: 340
Joined: May 2006
 
Posted: 2018-05-25 14:47
> it basically boils down to Jensen's inequality.

That's probably the understatement of the year. "Oh yes, rocket science - it basically boils down to conservation of momentum."



"There is a SIX am?" -- Arthur

Strange


Total Posts: 1436
Joined: Jun 2004
 
Posted: 2018-05-25 15:14
You really don’t need to know what Jensen inequality is to understand this, IMHO. Just think about the payoff profile for the two instruments and see how it would feel to have a spread between the two.

I don't interest myself in 'why?'. I think more often in terms of 'when?'...sometimes 'where?'. And always how much?'

frolloos


Total Posts: 43
Joined: Dec 2007
 
Posted: 2018-05-25 16:27
Yeah, I sometimes oversimplify things, but the basics are important I think. The trading is of course more than just Jensen's inequality, just like launching a rocket is more than conservation of momentum, eg what kind of beers should you bring.

Agree that you can also see the vol of vol from the payoff function.
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