Volatility and Options
Many of the largest losses and risk management failures of recent years began with a surprise in volatility — the kind of “once-in-a-lifetime” financial shock that markets experience more often than the phrase suggests.
Projecting Unlikely Events
The underlying risk management failure was usually an inadequate projection of unlikely events.
Historical Simulations
Simulations based on history were inadequate.
Correlations
Correlations — often unstable, and prone to converging on 1 in a crisis — were not tracked closely enough.
Options Skew
Options skew was not adequately modeled.
Volatility Term Structure
Volatility term structure was not adequately modeled.
Idiosyncratic Events
Idiosyncratic events were left out of the risk analysis.
Not Every Dislocation Is a Normal Market Move
Disputes, arbitration and litigation followed in many cases, including the Volmageddon collapse of February 2018 and the Allianz Structured Alpha losses of 2020.
Experts on volatility trading, and on volatility and variance swaps.
Expert in fixed income, equity, FX and commodity markets
Specialized in volatility term structure and term structure modeling
1980s pioneer in caps, collars and swaptions
Consultants in multiple matters relating to strategies employing the sale of volatility through options or swaps in equity markets, in fixed income, in FX and in commodities.
Including due diligence, oversight and execution of volatility-based strategies
Consultants in risk management strategies employing the purchase of volatility through options, swaptions, caps and floors in fixed income markets and in options in equity markets.
Stress testing of out of the money equity and fixed income options for risk management
Managed a $1,000 billion mortgage portfolio hedged with swaptions
Valuation of out-of-the-money FX cross-rate options
Experts in exotic options and swaps, including:
Valuation of binary slope-of-the-yield-curve contracts
Valuation of knock-out and knock-in contracts
Cellphone population units embedded in contracts
Compensation dispute related to the profitability of a long-dated option
Analysis of relationship between energy options implied volatility and the real economy
VIX vs V2X in 2 yrs
3D vol surface of SPX index on March 9, 2020
Source: Bloomberg
Source: Bloomberg
3D vol surface of SPX index on Feb 24, 2022
Source: Bloomberg
Selected regulatory actions:
Department of Justice (DOJ) - Three Portfolio Managers And Allianz Global Investors U.S. Charged In Connection With Multi-Billion Dollar Fraud Scheme: Gregoire Tournant, Chief Investment Officer of Allianz Global Investors U.S.’s Structured Products Group, and Two Others, Charged With Fraud Offenses