Cross-Region Volatility Analysis for Investing and Hedging

The final presentation at CBOE’s Risk Management Conference in Bonita Springs, FL was a discussion of Cross-Region Volatility Analysis for Investing and Hedging.  Vishnu Kurella, Portfolio Manager at Caxton Associates and Ramon Verastegui, Managing Director, Head of Flow Strategy & Solutions Americas for Societe Generale.  Both are favorite presenters at RMC and drew a very large crowd.

Their presentation covered a variety of important topics such as how natural derivative flows in the US, Europe and Asia impact product design, how equity volatility surfaces are impacted by supply demand imbalances in all three regions.

They also addressed a topic that came up at RMC in Asia last December, the market impact of structured products.  They noted that equity linked autocallable products based on the Hang Seng China Enterprise Index (HSCEI).  Apparently a large number of these products were sold last year and the result is a spillover effect on markets like the Hong Kong Dollar and Korean Won.  A level to focus on is 7,500 for the HSCEI (it closed at 8374 today).  They noted in the US that variable annuities are a dominant product and that indexed annuity issuance hit a record in 2015.  Skew across regions was compared with Asia appearing to be low, but it was noted that it may be justifiably low.  SPX skew was noted to be high and justifiably so as being long skew has not been a winning trade in either Asia or the US.

They listed several trading opportunities based on market dislocation strategies.  Relative value trading was suggested with volatility being cheap in Asia and Europe and expensive in the US.  Skew trading ideas focus on risk reversals and call/put ratios.  Many suggestions were made with respect to selling convexity that involved selling VarSwaps versus a variety of instruments.

They left us with several conclusions.  A main factor driving the difference between structured products has the different types of structured products issued in each region.  The result is trading opportunities based on the regional dislocations.  They pointed to a focus on positions weighted, strikes, and entry timing as key to successful trading.  Their final thought, which should be a positive for vol traders, is that they believe these dislocations are here to stay.