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8

Put simply, VIX is a spot index (fair value to a variance swap on SPX of constant maturity) that you cannot own as a security. Market participants create futures for you to trade. Futures trade higher than the VIX -- if you long VIX futures, you lose when the futures contract converges to VIX. You therefore have a negative roll-down. VIX ETF doesn't avoid ...


4

Delta one trading desks provide synthetic exposure to their clients. OK, so what does that mean? Delta One desks give their clients exposure to a product (stock index, ETF, or even a single stock) without the client actually buying the underlying product. For example, a customer can take their money and buy the stocks in the SP500 index. Or, they can ...


3

Apologies in advance for being hyper-critical. I have somewhat strong feelings about this =P The purpose of risk parity is to improve portfolio efficiency via achieving better diversification. (We won't delve into philosophical debates about whether or not this is true here...) Mechanically, by leveraging up low risk assets (e.g., US Treasuries) and ...


3

A margin loan and a levered ETF work differently. Suppose you have 1000 cash in your account and you want to buy 2000 dollars of SPY. On margin, the loan will be -1000 and your equity will be 1000. Then your initial leverage will be 2:1. But if the value of your SPY goes to 2200 it will be -1000 loan, 1200 equity, 2200 market value, or a leverage of 2200:...


2

Leveraged ETF have negative gamma: the higher the volatility of the underlying index the bigger the negative drag. This is a big pitfall of those instruments because one can be correct with the overall forward direction of the market for say the next 1 year and still lose money with a LETF. For example if one bets the SPX will go down over next 12 months ...


2

1) Physical Replication would entail taking actual positions in the full or subset of instruments that comprise the ETF. This method would necessarily require a list of the holdings and weights of the ETF or the Index which the ETF attempts to track. Alternatively, in order to minimize the costs of replication, some will use an optimization approach by ...


2

Here is my take on trying to answer this question. My backtest goes as far as December 1979 (just before the great bond bull run). I used daily total return index for Wilshire 5000 and 10-year constant maturity treasury rates. Remember you can proxy total bond return for $Yield - Duration*\Delta Rate$. Nevertheless, I agree with Helin that this is a less-...


1

One popular strategy and the one that works very well if it can be done is hedging using futures. This can be done on both sides.


1

ETF market-making has a more complex mechanism than 'regular' market-making. This answer deals explicitly with open-ended ETFs. I will refrain repeating the details about market-making that most people know that have already been asked and answered ad nauseum. On top of traditional market-making in the secondary market in which traders trade with each ...


1

The market maker's operating model is simple - Buy at Bid, Sell at Ask. Bid is always less than Ask. The Bid/Ask spread generates the profit, and market competition (i.e. presence of other market makers) causes this Bid/Ask spread to tighen (i.e. the spread becomes less as competition increases). How exactly do they sell at the higher ask price? ...


1

Any number of reasons...between vendors, could be small pricing discrepancies, calc differences, etc. Within a given system, it's likely attributable to update frequency. I've seen some providers with data published that was months old. Per the comments, looks like this falls into that camp. When in doubt, download returns and do the calculations ...


1

A partial answer could be legal or accounting reasons: Legal reasons: Certain investors may not be allowed to buy outright derivatives or borrow large amounts of money. Accounting reasons: Similarly, from an accounting perspective (e.g: financial ratios, capital requirements, covenants,…) there may be benefits in materializing an exposure through mutual ...


1

Funds that pay dividends hold each companies dividend until the end of the quarter and pay it as a lump sum. Until this is done the fund has lost no value. But when paid drops the value of the payment. You must remember they are continually taking fees out of this amount.


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