Citi Funding is offering a hedge against the negative correlation between volatility and equity markets as well as an option to take a view on volatility. Citigroup Funding has launched exchange-traded notes (ETNs) based on the performance of its newly created Citi Volatility index. "This underlying index is a close replication of the Vix index," says Oscar Loynaz, head of Americas structuring and packaging at Citi Cross Asset Group in New York. "We find investors wanting to have access to the Vix for two main reasons: as a hedge because of the negative correlation with the broad equity markets, or because they have a view on volatility as an asset class." The index measures the implied volatility of large-cap stocks. Similar to the Vix, which measures the 30-day implied volatility of the S&P 500, it is a mathematical measurement of that volatility. "In general, there is demand from investors to have a proxy to the Vix index in their portfolio," says Thomas Jarck, head of US index flow and exchange-traded fund trading at Citi equity trading in New York. "Because of the way the Vix is constructed, investors cannot trade the Vix itself. Based on historical analysis, our product can be best thought of as a tradable proxy to the Vix." Although the ETNs are long term (10 years), they are designed to be both liquid and transparent. "The expected liquidity of the product means investors can adjust their exposure and theoretically don't have to hold it for the 10-year tenor," says Loynaz....
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