Explain the use of volatility ETFs as a hedging tool in a portfolio.

Volatility ETFs, which track volatility indexes like the VIX, can be used as a hedge against market uncertainty. Imagine that you have a portfolio with ETFs that have a long position in the market. When stocks go down, the market tends to be more volatile compared to when stocks go up. One of the psychological reasons is that people tend to panic when markets move down. Another reason is that market crashes result in big downward moves, whereas market move up slowly during bull markets. In times of high market volatility, these Volatility ETFs tend to increase in value, potentially offsetting losses in equity positions.

Interview Questions Derivatives Theory Volatility ETFs

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