Nah, let's look at their exposure apart from the bit which they retain (32%, I think; which I guess doesn't need to be hedged, as it's not really live). They sell XIV to the end investor. End investor ends up short vol, whereas CS ends up long and then they hedge it by selling vol. So at a given point in time, their portfolio is short XIV and short VIX (in some way). When VIX moves a little bit higher, they are indifferent, as they're hedged. However, if VIX goes up bigly, the probability of XIV disappearing into thin air goes up, which means that, on aggregate, they get shorter and shorter vol as they get closer to the barrier. When XIV disappears, they're just left with their short VIX hedge. EDIT: Obviously, this is just my understanding and I could be (and often am) wrong.
that was my understanding as well. So the XIV is now effectively gone, but they are still short the VIX hedge which they have to buy back. Given that they are effectively running the table they might be profiting bigly by this.
Yeah, although I guess it depends on how they hedge exactly... Given the nature of this thing, I imagine they were probably pushing it, as VIX was going higher. It’s proper wrong-way risk for the XIV longs.
I think I got it. As the vol is going up and the XIV is losing value, Barclay's notional to hedge will be dropping as well. So while Barclays is short vol against their XIV they might actually be buying vol to cover the drop in notional and that would push the XIV to zero.
Yeah, it's not that they're hedging XIV itself... They're, effectively, hedging their hedge, which will look increasingly nekkid as VIX goes up and XIV gets closer to the barrier. It's a pretty typical thing that happens with all the 1st generation exo stuff in FX. Just bigly short gamma.
https://finance.yahoo.com/news/amid-volatility-surge-credit-suisse-152752903.html I might be late, haven't read through this post but looks like they are terminating XIV. Anybody read through the prospectus and care to share how that will work? It says the 20th, so I assume they will just settle it up on that date based on the value at that time? Last I checked it was trading at a premium to its indicative value
So the best move for a huge multi billion dollar hedge fund is to simultaneously dump their broad market stocks during technical weakness opportunities, buy VIX calls, buy puts on XIV, and short CS. All of this creates a self fulfilling prophecy of terminating the XIV. Somebody must have known the mechanics of this unwind and how it would have played out the way it did. Is it possible somebody engineered this whole thing to fail when the opportunity presented itself? Seems so simple right? Anytime VIX goes up 100% this thing is toast as written in the prospectus. Now the question is how do you make the VIX go up 100%? Who wants to launch another one of these ETN? How do you engineer the next 100% VIX move while you short the POS to zero? Some quants out there must be figuring these things out.
While I agree with your hypo....there is this concept of regulation where an investment bank (CS) is not supposed to be underwriting product designed to fail or be so easily manipulated. Not to say it dosen't happen. Btw...not a fan of more regulation.
I find it interesting that the media attention (even before the termination announcement by XIV) has been largely based around XIV, with less attention given to SVXY. Although SVXY is not terminating, SVXY "investors" have lost over 80% since Friday. At some point in the future, when the VIX futures rise by a large amount, SVXY will likely experience another 80plus percent loss in a day. .