Nº 19-64: Volatility Dependent Structured Products

We construct a derivative that depends on the SPY and VIX and, in this way, incorporates both the market risk premium and the variance risk premium. We show that our product has a Sharpe ratio that is at least as high as the Sharpe ratio of the SPY. If one could invest $10,000 either in the product or the SPY at the end of 2008, the payoff of the product would be around $80,000 at the end of 2018 whereas the payoff of the SPY - around $30,000.