Definition ∞ Volatility tranching is a financial engineering technique that segments an investment product into different risk categories based on their exposure to market volatility. This allows investors to choose a tranche that aligns with their specific risk tolerance, from lower-risk, lower-return segments to higher-risk, higher-return segments. It repackages risk.
Context ∞ In the digital asset markets, where volatility is a prominent characteristic, volatility tranching could become a mechanism for managing and distributing risk in structured products. This approach could attract a wider range of investors by offering customized risk exposures to volatile cryptocurrencies. The development of such sophisticated financial instruments would necessitate robust risk modeling and regulatory oversight to protect participants.
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