simulated XXV = $20 * (1 - (VXX-109.48)/109.48 )

which results in values that are fairly close to actual XXV values. See prospectus on page PS-7 for the proper formula.

For more exact calculation I reverse-engineered a better reference price of 108.03, which is probably close to the VWAP price of VXX on that day, making the formula

**simulated XXV = $20 * (1 - (VXX-108.03)/108.03 )**

This answered my previous question of why XXV return was lower than VXX - it was not, I just was using the wrong reference price. The second question was regarding volatility - XXV has about half of daily volatility of VXX. Here again the explanation is fairly simple - as VXX goes lower its dollar volatility decreases, and dollar volatility of XXV decreases, but in % terms XXV volatility decreases because XXV is now at a higher price.

**In fact I can make a prediction that at some point as VXX goes lower, XXV will approach its maximum value of $40 slowly, penny by penny.**

I want to thank all the readers who emailed me with their comments, especially William W. for his helpful explanations!

So what do you think iPath will do as XXV approaches $40? Because at some point the volume traded should start drying up, right?

ReplyDeleteSame goes for VXX, for that matter. Do you foresee a reverse split for VXX and accompanying forward split for XXV? And if so, any predictions for when?