Options traders are about to be able to execute options trades for volatility indexed to government notes.
The Chicago Board Options Exchange (CBOE) futures exchange will be listing and trading futures linked to the CBOE/CBOT 10-year U.S. Treasury Note volatility index (VXTYN) beginning on Thursday, November 13, pending regulatory review.
CBOE CEO Edward Tilly made the announcement during his address to attendees at the CBOE Risk Management Conference Europe, currently taking place outside of Dublin. Traders can use the VXTYN futures to help hedge themselves against interest rate volatility, he noted.
The VXTYN Index, on which futures on VXTYN is based, is calculated by applying the CBOE Volatility Index (VIX Index) methodology to futures options data from CME Group’s 10-year U.S. Treasury note contract — one of CME Group’s most active interest rate options products.
In May 2013, CBOE began disseminating values on the VXTYN Index as part of an agreement between CBOE and CME Group.
“Interest rate derivatives represent the largest asset class, by far, in the over-the-counter market, outweighing the equity derivatives market by many multiples,” Tilly said. “We are pleased to tap into this space by introducing a CBOE Volatility Index futures product that offers customers a way to hedge pure interest rate volatility risk based on U.S. government debt with a single product for the first time.”
Potential users of futures on VXTYN could include mortgage-backed securities investors and other large credit managers seeking to hedge against adverse interest rate movements; large bond funds that are naturally long interest rate volatility and are seeking a yield-enhancing mechanism; and hedge funds, volatility arbitrage firms and global macro participants seeking to express their views on forthcoming monetary policy events or to capture mispricing anomalies between cross-asset volatility (e.g., fixed income versus equity volatility).
