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Benedicte Gravrand, Opalesque London:

Investing in volatility could provide sustainable performance in the midst of continued market uncertainty, according to F&C’s Alternative Investments team.

During a press briefing in London yesterday, fund managers Stephen Crewe and Christopher Childs said volatility offers a true portfolio diversifier compared to traditional asset classes.

Although many users of derivatives have a market direction mindset, F&C, an independent London Stock Exchange-listed asset management group, believes that the most important pricing parameter to derivative specialists is volatility (vol).

To price an option, a trader must assume a level of vol for the underlying instruments over the life of the specific contract. Knowing what the market expects, i.e. what is embedded in the price, allows a view to be taken relative to this expectation.

Whereas traditionally expressing a vol view required the trading of plain vanilla options and hedging of the resulting delta risk, it is now common practice to use simple over-the-counter (OTC) contract for the difference between implied volatility and realised volatility.

While implied vol refers to the market's assessment of future volatility, realised vol (also called historical vol) measures what actually happened in th......................

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