Financial Times: Low Volatility Hits Derivatives Trading

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Weekly Review 2

July 5, 2014

Financial Times: Low volatility hits derivatives trading

This article that I am doing review on is called Low volatility hits derivatives trading from Financial Times, written by Philip Stafford in London and Gregory Meyer in New York on July 3, 2014.

The main discuss in this article is about the how the interest rate and volatility influence the derivative market. So, because of the low volatility in markets from bonds to commodities, investors are less likely to trade the hedging instruments to hedge their risk, because the volatility is low, which means that the market will not fluctuate too much, and the risk is smaller. Compared to the risk of volatility, the cost of hedging risk seems higher. Moreover, this torpor is affecting the profits of exchange groups such as CMS Group, IntercontinentalExchange and Deutsche Borse, because analyst believes that high volatility is beneficial to trading.

While the volatility is low, the interest rates are rising, which brought up the interest rate derivative products. The volume of CME euro interest rate futures rose 20.6per cent in the first compared to the same period last year, which led to its average daily volume of CME’s interest rate products have been running at the highest level since 2007. Nevertheless, it has been reported that there is a number of trades in short-sterling futures and options that are used to speculate or hedge against rate changes due to the fact that England governor thinks the lending interest is going to rise sooner than expected. However, both ICE and Eurex, a derivatives bourse owned by Deutsche Borse, recorded a decrease on their derivative volume and expecting further drop because of low volatility. Also, a negative interest rate on overnight deposits that is imposed

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