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Swaps, Forwards, and Future strategies (Managing interest rate risks…
Swaps, Forwards, and Future strategies
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Managing equity risk
Equity swap
- pay equity, receive fix/receive float/receive equity index
Total return swap
- includes dividends
- cash or physical settled
Equity forward/futures
- typically an index
- can be any equity
- assumes has beta of 1 for index or else basis risk
Cash equitization
- convert cash into equity
- Nf = Bt/Bf * (s/f)
Managing volatility
Volatility futures and options
- VIX index = price of near-dated call/put on the index, measures the expected volatility over the next 30 days
- flat = remain stable
- backwardation = vol in the short term
- contango = vol in long term
Variance swap
- directional bets on implied vs actual volatility
- long variance payoff positive if realized variance > variance strike
- settlement amount = variance notional x (realized variance - variance strike)
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