1
$\begingroup$

How are volatility products set up so that they have constant vega everywhere and what is the intrinsic difference between these products and vanilla options that determines the difference in vega?

$\endgroup$
  • 3
    $\begingroup$ The volatility product that has constant Vega is the Varswap (or its uglier cousin the Volswap). It was invented for this purpose. May I ask what is your specific question? $\endgroup$ – Alex C Sep 24 '16 at 16:12
  • 1
    $\begingroup$ As mentioned by Alex C I would advise you to read about variance swaps. Maybe this can help you to get started: sbossu.com/docs/VarSwaps.pdf. $\endgroup$ – Quantuple Sep 26 '16 at 8:33
  • 1
    $\begingroup$ @Quantuple Thanks for that pdf, looks good, would be acceptable as an answer $\endgroup$ – Permian Oct 15 '16 at 21:49
  • 2
    $\begingroup$ It depends what you mean by constant though, volswap and varswap Vega decreases with time. And also, vol swaps don't actually have constant Vega in strike space (though it is for any reasonable values I guess). $\endgroup$ – will Oct 16 '16 at 21:08
4
$\begingroup$

Here is a document that will answer some of your concerns. There are many other good reads out there but this one is a nice one to get started with.

In case the link is broken at the time one reads this answer, the document is called "Just what you need to know about variance swaps" by Sebastien Bossu (JPMorgan 2005).

$\endgroup$
  • $\begingroup$ The link is broke. $\endgroup$ – Hans Dec 25 '17 at 23:13
  • 1
    $\begingroup$ I've just updated the link. Thanks for pointing it out :) $\endgroup$ – Quantuple Dec 25 '17 at 23:20

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.