CBOE Risk Management Conference (RMC) Europe – Day Three Morning Wrap

After Bruno Dupire’s well received mornink keynote, attendees had two 9:45 am presentations to choose from at RMC Europe this morning. Here’s what they saw:

Rob Heck, Head of European Flow Derivative Trading, Barclays Capital, and Pierre de Saab, Portfolio Manager, Dominice & Company Asset Management, discussed “Trading Implied Volatility”.

Heck discussed three reasons to use volatility products. First, buying volatility derivatives can reduce the implicit risk of allocating cash to bonds, because the bull market in bonds has increasing risk. Second, buying VIX futures can hedge the risk of a sharp market decline in which all asset classes tend to be correlated in market declines except volatility. Third, buying volatility derivatives can increase performance during neutral market periods, because volatility tends to be mean reverting. Short-term “small” market declines can still cause sharp price rises in volatility.

Pierre de Saab discussed the Practical Aspects of Volatility Trading. He asked (and answered) a question that we get very often. This question is, “Why trade volatility?” and he gives three answers to this question. First, trading volatility can result in a leveraged directional position. Second, a trade based on volatility may be implemented to protect a portfolio against adverse market movements, similar to Heck’s thoughts. Finally, for managers that are benchmarked with the goal of providing absolute returns, trading volatility offers excellent opportunities.


The second presentation covered “Volatility-Based Solutions for Insurance Companies“.

The speakers were Dr. Pin Chung, Chief Financial Officer and Chief Investment Officer, R+V International Business Services Limited, Mr. Frederic Smadja, Head of US Flows and Structured Index Trading, Natixis and

Mr. Frederic Suhit, Head of Derivatives, AXA Investment Managers

Below are summaries of some of the comments by the expert speakers (Matt Moran from CBOE went through two pads of paper making notes on their talk. Rather than edit them we thought we’d give you all his observations).

Dr. Pin Chung noted that reasons for vega hedging include:

1. To protect policyholders’ benefits

2. To protect company solvency

3. To suit regulatory requirements

Dr. Pin Chung noted that instruments that can provide vega include —

Puts and Calls

Put and Call spreads

VIX futures and options

Variance swaps

Many other instruments

Dr. Pin Chung listed some criteria to select instruments —

Deliver what they claim to do


Transaction costs and bid-ask spread




Collateral and counterparty risk

and other criteria

Dr. Pin Chung concluded by saying…Set vega hedging strategy incorporating company’s targets, accounting rules and risk management objectives.

Mr. Frederic Suhit said that

“Solvency II” (with a solvency capital requirement) is a big challenge for European insurers.

“Option-linked” strategies can enable a reduction of capital charges.

We have an overlay strategy with put options protection and rolling of put options.

We have explored the adding of long volatility exposure.

We are exploring the creation of a long volatility fund. We plan to use active managment to try to manage carry costs.

A panelist made the following observations:

SPX term structure is very steep

There is less supply in long-term volatility Insurance companies have a need for innovative hedging. Traditional hedging could use options and futures to provide downside protection.

New trends for enhanced protection include volatility overlay solutions.

The NXS Rolling Volatility Strategy (NXSRVS Index) is based on use of VIX contracts, with a dynamic long/short strategy.

Weeklys options are a big plus

VIX products improve the leeway in investment timing and decision-making.

 The point was made that many insurers want flexibility with options contracts. The CBOE has FLEX Options (flexible terms, European or American Style, pick your own strike, pick the expiration date, etc).

For more information on FLEX options (including open interest in contracts that expire in years out to 2021), please visit http://www.cboe.com/FLEX

Matt Moran