Sal. Oppenheim, a German private bank, is looking to use variance swaps for the first time. Peter Schwendner, head of quantitative research at the firm in Cologne, said it is considering using the instruments to hedge its structured investment products book. "We have a strong structured products business," he said, explaining until now, Sal. Oppenheim has concentrated on building up this business, but now it is beginning to look at hedging strategies.
"The quotes are very liquid, it's a nice and fair product, and it's easy to price," said Schwendner, who declined comment on exactly when the firm will enter its first variance swaps. Sal. Oppenheim will likely first buy variance for its structured equity book, but may at a later stage trade the swaps, he added.
Equity-linked investment products, which often involve firms selling single-stock or index options to investors, create a short volatility position for the firm. Variance swaps allow counterparties to take a view on the standard deviation of either an equity index or single stock underlying, and are liquidly traded by hedge funds, dealers and increasingly by asset managers.
