I used Derman(1999) method, to calculate the fixed Kvar for Variance Swaps using actual option price data. The first Pic Shows the outcome. (ignore the 0s).I plot the sqrt of Swap rate enter image description here

Now the profit and loss of short var swaps is totally wrong, the Sharpe ratio is 2.Makes no major losses in 2007

I want to ask how the realized Var is actually computed, to calculate payoff. Do I need to annualise it, currently I multiply RealisedVar with 365/45. as Maturity is 45 days. P&L is depends on the multiplication factor. Kvar is not anualised so why should realized var be?

see https://en.wikipedia.org/wiki/Variance_swap#cite_note-FINCAD-1

  • $\begingroup$ What makes you say that the P&L of being short a Varswap is "totally wrong"? What are you comparing it to? $\endgroup$ – Alex C Mar 6 at 23:10
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    $\begingroup$ It just keeps going up. A huge loss was made in 2007. According to a figure in Asset Management by andrew Ang, this profit and loss is not correct. I should have a large loss. Also, such profits are not reasonable $\endgroup$ – Irtza Ahmed Mar 7 at 3:43
  • $\begingroup$ Have you read this: quantlabs.net/academy/download/free_quant_instituitional_books_/… $\endgroup$ – ilovevolatility Mar 8 at 10:05

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