It is clear that volatility in interest rates, bond yields and foreign exchange markets will accelerate and that firms will need to consider ways to hedge that volatility. One benefit of a lower starting point in volatility is that it reduces the cost of hedging as the demand from market participants to protect against extreme scenarios decreases. As volatility declines, so does the cost of ensuring against it, as reflected in option prices Such market dynamics could explain why the vix can be depressed even in an environment of heightened uncertainty. This rare shift may prompt investors to rethink their asset allocations. The authors believe that higher buyout debt can be justified since (a) pe ownership lowers expected distress costs (since buyout firms often contribute capital in a downturn), (b) buyout companies exhibit lower sales volatility than comparable public companies and (c) the asset values of value buyout companies are less volatile than public.
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