Volatility overlay provides reduced costs
A side effect of reducing the overall risk is that investors are able to benefit from increased returns in times of low volatility and a reduced cost of the underlying investment. Since issuers of index linked products have to hedge the underlying investments, having a reduced exposure when volatility is high and costly to hedge means that there is a reduced cost associated with these products. The last year has already seen a number of structures introduce a volatility overlay to their products. When you consider the rationale for volatility targeting, and see how it can deliver real benefits in practice, it’s clear that volatility overlays are not something to shy away from and are here to stay.
Read more on Volatility Overlay Pricing in our March 2011 issue