Do you know any really simple references on target volatility options in a real-world context?
There are lots of references online, but it's not clear to me what the payoff is.
In particular, if the payoff depends on a volatility, how do you convince the customer that the chosen volatility is correct?
Is the VIX index used?
I'm just very confused about the whole concept.
Or is it that the weighting of assets in a portfolio somehow depends on the "target" volatility?
This seems fraught with problems. If the buyer of the option doesn't profit, I'd expect an argument about how the volatilities were assigned.
Unlike price, "volatility" can be computed in many different ways.
Feel free to reply with a URL -- none of the explanations I've seen are clear.