Assume a client has $11MM in S&P 500 index. He is worried about a drop in the markets and wants to hedge it out. Some of the choices the client has are 1) Buy options on S&P 500. (There are ETFs on S&P 500 on which a retail client can buy options or there are direct options on S&P 500) 2) Go long volatility. The VIX index is a measure of volatility and is inversely correlated to S&P 500- so he can buy options on it 3) Other assets that may be negatively correlated with stocks if you can think about it.
Please perform some analysis to come up with the most cost effective way of hedging. Just one page description and one excel spreadsheet to establish the calculation ie correlation, cost etc.
I think you have to collect some empirical data and form certain portfolios as mentioned above, then calculate all the hedge ratios and costs associated with it, then the p&l under each senario, before drawing any conclusions. The answer itself does not matter, the key is you have to do something to show your strength.
Btw, one can not assert VIX hedging is the best, you have to prove it!!
I think you have to collect some empirical data and form certain portfolios as mentioned above, then calculate all the hedge ratios and costs associated with it, then the p&l under each senario, before drawing any conclusions. The answer itself does not matter, the key is you have to do something to show your strength.
Btw, one can not assert VIX hedging is the best, you have to prove it!!
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