visit the website https://ipathetn.barclays/details.app;instrumentId=341408 and
familiarize yourself with the Barclays iPath VIX Futures exchange traded note (ETN), which
trades under the symbol VXX. The site includes links to pdf files containing complete documentation. You will need to read at least some of the prospectus to understand the details of the fund’s
construction.
You can get the ETN history from http://finance.yahoo.com/q/hp?s=VXX+Historical+Prices.
A minor detail is that the original VXX contract traded from January 2009 through January 2019,
when it matured. In January 2018, Barclays created a second one which traded under the symbol
VXXB. In April 2019 they switched its symbol to VXX. On the Canvas site, there is another Yahoo spreadsheet for the original note. You should paste the two data series together (adjusting for
splits), and treat it as a single security from 2009 until now.
Prepare a report assessing the risk and reward characteristics of this instrument. In particular,
your report should address the following four questions.
ˆ Question 1. Briefly summarize how the ETN works. What does Barclays do with the money
in the fund? Is the fund levered? Is there an arbitrage relationship that links the market
value of VXX to the level of the VIX index?
ˆ Question 2. Plot the cumulative returns to date on VXX. From the available historical data,
provide an estimate of the market price of VXX risk.1 Make sure to annualize the numerator
and denominator appropriately.
We can view this as an estimate of the market price of VIX risk if the two series are tightly
linked.2 What is the correlation between daily VXX returns and the daily changes of the
(log) VIX index?
ˆ Question 3. Under the type of stochastic volatility model we have been using, it is not hard
to show that the market price of VIX risk is the same as the market price of actual S&P
500 volatility risk. So we can interpret your VXX risk price estimates as that quantity as
well. The next topic to investigate is whether there is any evidence for predictable changes
in this price of volatility risk. This is equivalent to asking whether there are any good timing
strategies for trading VXX