How to reduce the risk while we are entering into the derivatives market

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• 
  Geoffrey Cadogan

  Hi Raja (King) Sekaran: I have a work-in-progress that addresses aspects of your question. Here's the abstract: Market Neutrality and Variance Futures-Volatility Swaps by G. Cadogan --- Abstract --- Work-in-progress We introduce a market neutral asset pricing model in which risk and returns are characterized by variance futures and realized volatility in a high frequency trading environment in spot and futures markets. Synergies between a futures CAPM for intraday returns (in contrast to (Black 1976, pp.~172-173) psuedo-CAPM for daily change in future prices reset to zero at end of trading day), and a recent stock price formula for high frequency [intraday] trading with exposure to hedge factors, show that portfolio alpha is a function of cost of carry premium and arbitrage between variance futures and realized volatility. To wit, market risk premium is irrelevant, i.e. there is no beta risk, so returns are based on pure variance-volatility swap(s). One attractive feature of the model is that the price of variance futures relative to realized volatility serves double duty as a dynamic hedge ratio. Thus, the sign of the dynamic hedge ratio provides impetus for a trading rule for statistical arbitrage between variance futures and realized volatility. Another attractive feature of the model is that it can be easily modified to admit beta arbitrage if beta risk is nonzero. That paper is a spin off of the one(s) in the attached link where I provide a set of examples of applications. The buzz word and catch phrases these days is "managed futures" employed by CTA (Commodity Tradinng Advisors) who register with the CFTC (not the SEC) and who use market neutral investment strategies. To wit, commodity markets are not included in the "market portfolio" popularized by CAPM. So they provide an opportunity for diversification and risk reduction. There have been some new products introduced on the market like emerging market variance futures, and other products designed to facilitate volatility swap. So you might want to look at "managed futures", and pay particular attention to what goes on in the energy sector since volatility could be an investors best friend, and those markets tend to be volatile. I hope this helps.

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  Hi Raja (King) Sekaran:
  
  I have a work-in-progress that addresses aspects of your question. Here's the abstract:
  
  Market Neutrality and Variance Futures-Volatility Swaps
  
  by
  G. Cadogan
  
  --- Abstract ---
  Work-in-progress
  
  We introduce a market neutral asset pricing model in which risk and returns are characterized by variance futures and realized volatility in a high frequency trading environment in spot and futures markets. Synergies between a futures CAPM for intraday returns (in contrast to (Black 1976, pp.~172-173) psuedo-CAPM for daily change in future prices reset to zero at end of trading day), and a recent stock price formula for high frequency [intraday] trading with exposure to hedge factors, show that portfolio alpha is a function of cost of carry premium and arbitrage between variance futures and realized volatility. To wit, market risk premium is irrelevant, i.e. there is no beta risk, so returns are based on pure variance-volatility swap(s). One attractive feature of the model is that the price of variance futures relative to realized volatility serves double duty as a dynamic hedge ratio. Thus, the sign of the dynamic hedge ratio provides impetus for a trading rule for statistical arbitrage between variance futures and realized volatility. Another attractive feature of the model is that it can be easily modified to admit beta arbitrage if beta risk is nonzero.
  
  That paper is a spin off of the one(s) in the attached link where I provide a set of examples of applications. The buzz word and catch phrases these days is "managed futures" employed by CTA (Commodity Tradinng Advisors) who register with the CFTC (not the SEC) and who use market neutral investment strategies. To wit, commodity markets are not included in the "market portfolio" popularized by CAPM. So they provide an opportunity for diversification and risk reduction. There have been some new products introduced on the market like emerging market variance futures, and other products designed to facilitate volatility swap. So you might want to look at "managed futures", and pay particular attention to what goes on in the energy sector since volatility could be an investors best friend, and those markets tend to be volatile.
  
  I hope this helps.

  http://papers.ssrn.com/sol3/topten/topTenResults.cfm?groupingId=1939397&netorjrnl=jrnl ×

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  Jan 27, 2012
• 
  Mohd Hafizuddin Syah Bangaan Abdullah · National University of Malaysia

  Well, adopted effective internal risk management at the first place

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  Well, adopted effective internal risk management at the first place

  Apr 7, 2012
• 
  Bhushan Kamble · Shivaji University, Kolhapur

  Whenever we are going to enter any market, analysis the full market and study the volatility of market. high volatility will indicate high risk but other of it is we can get more return in same atmosphere. for risk measurement you can find many estimator, one of them is value at risk.

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  Whenever we are going to enter any market, analysis the full market and study the volatility of market. high volatility will indicate high risk but other of it is we can get more return in same atmosphere. for risk measurement you can find many estimator, one of them is value at risk.

  Jun 1, 2012