Information derivatives

This paper considers the problem of creating derivatives to provide tailored exposure to volatility risk

It has long been recognised that the concept of randomness is essential in describing the evolution of asset prices. Traditionally, the amount of randomness in the returns of financial assets is measured by their volatility. Until recently, volatility was used merely as a descriptive concept - an important theoretical characterisation of a tradable asset. The situation has changed with the arrival of volatility derivatives such as variance and gamma swaps that treat volatility as a tradable