Question #49

Some long volatility positions (e.g., long positions in variance swaps) exhibit positive (not negative) convexity, which indeed would be an advantage of adding this asset class. Volatility is highly negatively correlated with equity market returns, because spikes in volatility often coincide with sharp movements downward in equity markets. Thus, long- volatility contracts have a high negative correlation with equity. Selling volatility is a way to capture premia and provide regular cash flows, similar to insurance underwriting.