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What is the varswap basis? I am not completely sure what this number represents. Is it the basis between the estimated future realized volatility and the vol surface implied volatilty at a specified tenor?

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  • $\begingroup$ Where do you see that term? Is it in a paper? $\endgroup$ – chrisaycock Mar 10 '11 at 16:54
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Variance swap basis is the basis between theoretical value of the variance strip and the actual strikes traded in the brokers' market.

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  • $\begingroup$ I'll ask you the same question that the OP was supposed to answer: Where is this term used? Where is it published? $\endgroup$ – chrisaycock Sep 16 '12 at 20:41
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    $\begingroup$ Any time you are trying to buy a var swap in the IBD or from a market-maker, you will hear of it. It's not really published anywhere as a piece of market data, but it's fairly easy to calculate historically if you have broker markets for variance swaps. The term is an industry standard. $\endgroup$ – Strange Sep 17 '12 at 16:27
  • $\begingroup$ Ah, thanks. Your comment should be part of your answer. $\endgroup$ – chrisaycock Sep 17 '12 at 17:08
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Whatever it is, it clearly is not a common term of art in the industry. Three possibilities come to mind:

  1. To the options: Since one can (under certain assumptions about continuity etc) synthesize a variance swap from European option contract prices, the basis may represent the difference between varswap price and the synthesized price.
  2. To the VIX: If we are talking about SPX variance swaps there is a convexity-related basis to the VIX futures.
  3. To another tenor: As with futures, there is a calendar basis in variance swaps.
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