Replicating XIV/SVXY through futures (without the funkness)

Discussion in 'ETFs' started by Saltynuts, Feb 7, 2018.

  1. Saltynuts


    Martinghoul, would the XIV/SPXY owners have to come out of pocket if XIV/SVXY didn't shut down and VIX futures continued their upward climb? Or whoever hedged the issuer would have to come out of pocket?
    #11     Feb 7, 2018
  2. Yes, the owners would have needed to pay, I expect.

    We know that the issuer is not in the business of taking a view on volatility. The issuer's job is to collect their fees, manage the assets, all while being as flat risk as possible at every point in time. So, as I described on another thread, we can be reasonably sure that the issuer has a portfolio whether they're short XIV and short some VIX futures against it.

    If you're a XIV investor, in theory, you could also have a portfolio where you're perfectly hedged. However, this isn't likely, since the point of being a XIV investor is to have a view on volatility. Therefore, we can be reasonably sure that a typical XIV investor is just long XIV. If XIV didn't have an effective 0 floor, a typical investor's liability would have been unbounded.

    Obv, this is just my interpretation...
    #12     Feb 7, 2018