2020-08-18 Meeting notes
- Elisa Kendall
Date
Attendees
Agenda
1) Use Case reminder
2) Where we are on our road map.
3) Open Action Items
4) JIRA Issues Review - https://jira.edmcouncil.org/projects/DER/issues/DER-10?filter=allopenissues
5) Todays content discussion.
6) For next week.
Proceedings:
Today we continued working through the changes needed to support statistical swaps, including correlation and variance swaps. We moved a number of definitions from equity swaps up to swaps, and sorted out definitions for the broader concepts. The results are captured in DER-75 (work in progress).
Remaining work that we haven't touched based on last week's notes (i.e., remaining todos after today) includes migration of correlation leg from equity swaps to swaps, and ensuring that we have the following kinds of legs defined:
- dividend stream for a single stock (we have this)
- change in value for a single share
- change in value for a basket of shares
- change in value for an index
- value of a dividend stream for a basket of shares
- comparison of the change in value of a given share or basket or index against something else - for example, a single share against an index, which is the thing you are cross-correlating with the volatility of the share
Some of these are already included under equity observable, though we don't describe them in terms of the change in value of the observable. To really capture this notion, we'll need to construct something new that covers the notion of change in value and that then references the possible underlying concepts.
Some of the details are below, from the chat log.
from Jeff Braswell to everyone: 8:21 AM
A correlation swap is an over-the-counter financial derivative that allows one to speculate on or hedge risks associated with the observed average correlation, of a collection of underlying products, where each product has periodically observable prices, as with a commodity, exchange rate, interest rate, or stock index
from John Gemski to everyone: 8:40 AM
A variance swap is a financial derivative used to hedge or speculate on the magnitude of a price movement of an underlying asset. These assets include exchange rates, interest rates, or the price of an index. In plain language, the variance is the difference between an expected result and the actual result. (Investopedia)
from John Gemski to everyone: 8:45 AM
In finance, correlation trading is a strategy in which the investor gets exposure to the average correlation of an index. ... Sell a variance swap on the index and buy the variance swaps on the individual constituents; this particular kind of spread trade is called a variance dispersion trade.
from John Gemski to everyone: 8:56 AM
A variance swap is an instrument which allows investors to trade future realized (or historical) volatility against current implied volatility.
from John Gemski to everyone: 8:57 AM
That came from https://www.sk3w.co/documents/volatility_trading.pdf which is a 30 page explanation of this. This is from a JP Morgan document.
from Jeff Braswell to everyone: 9:04 AM
FYI: "implied volatility is the value of the parameter for which the Black-Scholes theoretical price matches the market price"
from John Gemski to everyone: 9:07 AM
One leg of the swap will pay an amount based upon the realized variance of the price changes of the underlying product. Conventionally, these price changes will be daily log returns, based upon the most commonly used closing price. The other leg of the swap will pay a fixed amount, which is the strike, quoted at the deal's inception. Thus the net payoff to the counterparties will be the difference between these two and will be settled in cash at the expiration of the deal, though some cash payments will likely be made along the way by one or the other counterparty to maintain agreed upon margin.