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Dresdner Bank - Volatility products

Certificates based on implied volatility indices open up new opportunities-

Customer profile: The product can be offered to a global investor acting in markets where a volatility index is established (e.g. Germany and America)

The past few months have seen a steady rise in the range of products which are based on implied volatility indices and therefore offer an opportunity to invest in volatility. Volatility indices are calculated by stock exchanges or banks, with the two best-known in relation to share indices being the VDAX, which measures volatility on the DAX German equity index, and the VIX, which relates to the Standard & Poor?s 500.

Volatility products raise a whole series of questions. Besides factors such as the technical feasibility and liquidity of the instruments and the purpose they serve for investors, discussion is focusing on the effect they have on portfolios? risk/reward profiles.

What is the relationship between the VDAX and DAX?

There is a negative correlation between volatility and equities (see chart 2). This means that implied volatility is a suitable instrument for diversification purposes and is regarded by many market participants as a separate investment category. The reason for this is simple: if negative information depresses a company?s profit outlook or even that of the entire equity market, efficient markets tend to reduce the valuation of that share or even of the entire market.

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