Sellers of swaption vega

frattyquant · July 4th, 2012, 9:35 am

Thanks Martin - I think thats interesting that some market participants look at vega and convexity as being equivalent in some sense, that could also explain why banks are willing to be net short vega.

Martinghoul · July 4th, 2012, 2:06 pm

In the past, in EUR there was all sorts of other stuff that used to systematically supply vol into the mkt. For example, EUR sovereigns, such as Italy, used to sell long-dated receivers (it was a "hedge" plus some yield pickup from the vol). Obviously, this isn't really happening any more. The alternative source of vega is callable issuance, but that has been slow to materialize.

nike61062x · July 6th, 2012, 12:24 pm

Yes most vol desks are always being asked to sell vol. But there are plenty of hedges. As mentioned below, tsy futures in the US and eurodollar options (have good correction to the ULC). in europe, there are futures on euribor futures. Also, they is plenty of desire to sell vol based on rv trading and desire to pick up theta. on the other hand, the vol limits are quite large at large banks.

SpeedBall · August 21st, 2012, 5:41 pm

Lately, in absence of callable/volbond issuance/sov supply, the source of vol has also been unwinds of previously short positions where the clients are profit taking in their now in the money receivers...that is in EUR