Volatility risk
Volatility risk is the risk of a change of price of a portfolio as a result of changes in the volatility of a risk factor. It usually applies to portfolios of derivatives instruments, where the volatility of its underlyings is a major influencer of prices.
Sensitivity to Volatility
A measure for the sensitivity of a price of a portfolio (or asset) to changes in volatility is vega, the rate of change of the value of the portfolio with respect to the volatility of the underlying asset.[1]
Risk Management
This kind of risk can be managed using appropriate financial instruments whose price depends on the volatility of a given financial asset (a stock, a commodity, an interest rate, etc.). Examples are Futures contracts such as VIX[2] for equities, or caps, floors and swaptions for interest rates.
References
- ↑ Hull, Options, Futures and Other Derivatives, Sixth Edition, p360
- ↑ http://www.cboe.com/micro/VIX/vixintro.aspx
See also
- Derivative
- Implied volatility
- Market risk
- Standard deviation
- Risk management
- Value at risk method
- Volatility risk premium
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