Correlation dislocation
Macro hedging in disrepair
Buying equity volatility has long been a way for dealers to macro hedge their portfolios, but the latest phase of the financial crisis has challenged the wisdom of such strategies. A dislocation between asset classes during the first half of 2010, coupled with the increasing cost of buying volatility, made certain hedges less effective than planned and has driven some firms that use macro hedging to rethink their approach.
The underlying assumption of buying volatility as a macro hedge is that
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