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Principles of Financial Engineering, 2nd Edition by Salih N. Neftci

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CHAPTER 15

Volatility as an Asset Class and the Smile

1. Introduction to Volatility as an Asset Class

Acceptance of implied volatility as an asset class is growing. The main players are (1) institutional investors, (2) hedge funds, and (3) banks. This increased liquidity facilitates the engineering of structured products with embedded volatility. Also, standardized trading in volatility of volatility and skew becomes possible.

EXAMPLE:

It appears that institutional investors are migrating to four types of strategies for going long exposure to implied volatility. Among the largest institutional investors, variance swap based strategies are the most popular.

Variance swaps offer the easiest and most liquid way to get exposure to volatility. Institutional ...

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