The riskiness of volatility products
From Hedge.lu
Firms Involved
- Credit Suisse
Year of the event
January 2018
Description of the case
On Monday 5th of January 2018, the volatility of US equities, as measured by the VIX[1], skyrocketed by 116%. This caused some serious issues on instruments designed to allow investors to bet against an increase of volatility. In particular, the VIX, and exchange-traded note (ETN), lost 93% of its value. However, huge intraday tracking error made the instrument exceptionally inefficient at replicating such a bet, in particular throughout Monday 5th[2]. In addition, Credit Suisse consequentially shut down the ETN, in accordance with the prospectus of the note which allowed the issuer to do so in case of daily variation of more than 20%.
Take-aways
- Selecting the right instrument to place a bet is key. For that, prospectus need to be read. The working of the instrument used needs to be thoroughly understood.
- In undertaking any kind of bet, beware of the tail risk (black swans).
