Managing Volatility and Capturing Returns Through Derivatives

Alexander Rudin (), Pravesh Kumar and Shubham Upadhyay
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Alexander Rudin: State Street Global Advisors
Pravesh Kumar: State Street Global Advisors
Shubham Upadhyay: State Street Global Advisors

Chapter Chapter 6 in Derivatives Applications in Asset Management, 2025, pp 105-121 from Springer

Abstract: Abstract This chapter describes advanced applications of derivatives in quantitative portfolio management, emphasizing their role in enhancing both risk-adjusted returns and absolute return potential. The first application, a Target Volatility Strategy (TVS), dynamically adjusts exposure to risky assets based on observed market volatility. A derivatives-free version of TVS demonstrates the limitations of lacking leverage, while an enhanced approach using equity futures introduces notional leverage, improving precision in risk targeting and boosting performance in low-volatility environments. The second application, a commodity carry strategy, captures absolute returns by exploiting the term structure of commodity futures. The strategy generates returns independent of market direction by holding long positions in backwardation markets and short positions in contango markets. The chapter illustrates how derivatives enable precise positioning, efficient capital allocation, and strategic flexibility in modern portfolio management through these examples.

Keywords: Quantitative portfolio management; Derivatives; Target volatility strategy; Commodity carry strategy; Risk-adjusted returns; Absolute return strategies (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-86354-7_6

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DOI: 10.1007/978-3-031-86354-7_6

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