Covariance Swaps

volga · Post by **volga** » Tue Jul 15, 2008 12:35 am

Hi guys..Have any you heard or seen of Covariance swaps traded in the equity market. I was reading the latest issue of the RISK Magazine and there seems to bea fair bit of noise made on this product. APologies for coming across as a noob but could someone in plain intuitive /practical terms explain to me the real advantage of practically trading these in the market as versus trading correlation through Options on a Basket vs a Basket of Options..I would have thought the latter is more easier and in my experience this is all that I have seen trading in the market..

Any papers / presentations etc would be of much help (The paper on google on covariance swaps is way too theoritical)

Veegan · Post by **Veegan** » Tue Jul 15, 2008 10:21 am

As far as I have heard the demand is for covariance swaps on an index vs index basis rather than on baskets (though they can be set up this way). In any case, I have sent you what I have.

V.

volga · Post by **volga** » Wed Jul 16, 2008 8:30 am

Thanks v much Veegan

Graeme · Post by **Graeme** » Wed Jul 16, 2008 8:10 pm

There is something on var, covar, correl, etc swaps available for download at an unmentionable website from a recent edition of an unmentionable magazine.

solider · Post by **solider** » Wed Jul 16, 2008 10:14 pm

when we sell a multi-und exotic to a client, we may not just be selling corr but also vega, fwds, corr skew, etc.

it makes more sense hedging the above with options (e.g. OBBOs) rather than cov or corr swaps. of course we have issues with "corr" not meaning the same thing for vanilla options compared to exotics, but these are small effects.