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Discussions on “Using Volatility Futures as Extreme Downside Hedges” by Bernard

Discussions on “Using Volatility Futures as Extreme Downside Hedges” by Bernard. Main findings: The author shows the hedging strategy using VIX futures is more cost-effective than a traditional hedging strategy using put options during the time period of Dec 2004 and Mar 2012.

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Discussions on “Using Volatility Futures as Extreme Downside Hedges” by Bernard

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  1. Discussions on “Using Volatility Futures as Extreme Downside Hedges” by Bernard • Main findings: The author shows the hedging strategy using VIX futures is more cost-effective than a traditional hedging strategy using put options during the time period of Dec 2004 and Mar 2012. • The author also shows his conclusion is robust because it applies to different objective functions, which minimizes risk/maximizes the (alternative) Sharpe ratio.

  2. Contribution of the paper • Great summery on the methodology of hedging strategies used in practice considering abundant practical details, with results supported with most recent historical data, providing excellent reference the topic in consideration.

  3. Suggestions • Audience: Practitioners or academics? • More relevant literature: E.g. DeLisle et al. (2010) which shows among others, the VIX “call options” is a superior hedging instrument for SPY.

  4. (2) Research questions: • First - Are puts and VIX instruments comparable? • Protective puts (b) VIX: Negatively correlated with equity value, especially when equity value decreases. $ SPX(SPY)

  5. Second research question: Supposing VIX is superior than puts, than move onto the comparison among VIX futures/options, synthetic VIX index, VT contracts, etc. (For liquidity problems).

  6. (3) Policy implication: • Can results be generalized to a bearish market? • To provide policy implications to dealers / corporations /government? (4) Minor suggestions: • I couldn’t link some of the equations to the others. E.g. from the last Eq. on p.4 (Modified objective function) to Seven objective functions used in practice (p.5 - p.7). • Easier to read through if you can move some practical details into footnotes.

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