Questions tagged [variance-swap]
The variance-swap tag has no usage guidance.
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How do banks and dealers effectively hedge a variance swap?
It is known that a variance swap can be replicated by a strip of options. However, it is costly to trade that many OTM options and there is not enough liquidity to trade the wings in the quantity that ...
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Barrier on realized volatility
I am trying to understand the risk exposures of vanilla options that also have a European barrier on realized volatility. For example, the option could knock out if the realized volatility over the ...
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Is variance swap long volatility of volatility?
In JPM's note on variance swaps, on page 29, they say "... a long variance swap is also long volatility of volatility".
In Bennett's book Trading Volatility, on page 115, he says "... a ...
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Volatility swaps hedging
I have heard that traders use a straddle to hedge volatility swaps (in the FX context), although I could not figure out the specifics. Is this type of hedge used in practice? And if yes, how does it ...
- 576
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104
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Smile wings and varswap pricing
Is it true that far wings of the volatility smile have an outsized influence on the price of a variance swap? Is there a mathematical argument demonstrating this idea? What do we generally refer as ...
- 576
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Calculating PnL of Options strategies with Volatility Surface
New to Vol trading - wondering if there are any good references on calculating PnL from options strategies if I only have a volatility surface (delta or moneyness) and no individual options prices.
...
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1
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Impact of stochastic rates on varswaps and volswaps
Let us consider that we are looking at issuing some varswaps or volswaps on some FX rate. By longer term I mean something longer than 3 months. Different from this time two years ago, now the interest ...
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Initial forward variance curve calibration
Let $V_t^{T_1, T_2}$ be the forward variance swap rate for the period $[T_1, T_2]$, seen from $t$ (see for instance Lorenzo Bergomi's Smile Dynamics II) and let $\xi_t^T = V_t^{T,T} = \frac{\partial}{\...
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Zero-Mean Realized Volatility Motivation / Variance Swap
What is the motivation for the use of zero-mean historical volatility and why is it the basis for variance swaps as opposed to variance calculated with mean?
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A lower bound for variance swap strike
There is a famous formula for the variance swap strike that reads
$$
K_{var}^2 = \int_{-\infty}^\infty dz\, n(z) I^2(z)
$$
where $I(z)$ is the Black-Scholes implied volatility function,
$$
n(z) = \...
user34971
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1
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527
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Derive the price of log contract
I am reading the Neuberger [1999] Log Contract paper and really confused on the log contract.
So if the payoff is $\ln(S_T)$, then we can easily solve the price of such derivative:
$$f_t^s = e^{-r(T-t)...
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329
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Market price versus theoretical price of varswaps
When I traded varswaps several years ago, for some indices there was a significant mismatch between market price and theoretical price.
The theoretical price assumes continuous monitoring and infinite ...
user34971
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2
answers
607
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Different types of swaps and generalized pricing structure - correlation swap, variance swap, volatility swap, gamma swap, etc
I am very new to derivatives pricing, and I am currently trying to learn these on my own.
As far as I can tell, most of the derivatives that are simple (in the sense of having a constant strike that ...
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Practical Effect of Time-Decay on Variance Swaps?
I want to implement a long vol hedging strategy by rolling spot variance swaps every month. This would be done through replicating spot VIX using the definition of VIX as a portfolio of OTM one-month ...
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699
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Capped Variance Swap // Fair volatility using replication portfolio
I know that the Heston volatility model should be the best approach for computing fair volatility on capped variance swap but is there a way to estimate it from replication portfolio?
What I call ...
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125
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Structured question on mark-to-market value of a variance swap
anyone can provide solution or some idea to the following question? thanks
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141
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VIX and Realised Volatility Scaling
I have calculated the VIX implied volatility according to the CBOE Whitepaper:
\begin{equation*}
\sigma^2 = \frac{2}{T} \left(\sum_i \frac{\Delta K_i}{K_i^2} Q(K_i) e^{rT} \right) - \frac{1}{T} \...
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535
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Deriving the VIX formula
I am having trouble filling in a few steps in the derivation.
From Martin (2017), we get the following assumptions:
Constant continuously compounded rate $r$;
The underlying doesn't pay dividens;
...
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Explicit formula replication of variance swap using vanilla option under black and scholes model with nonzero risk-free rate and nonzero dividend [duplicate]
I didn't find the formula for the following portfolio (variance swap replication) with nonzero risk-free rate and nonzero dividend under black and scholes model :
(1)
I found formula and proof only ...
user44204
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1
answer
244
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Replication of variance swap using vanilla option under black and scholes model with nonzero risk-free rate and nonzero dividend [duplicate]
I didn't find the formula for the following portfolio (variance swap replication) with nonzero risk-free rate and nonzero dividend under black and scholes model :
I found formula and proof only with ...
user44204
3
votes
1
answer
68
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Variance Swaps for IR products
Just a question here. I am aware that variance swaps for equity products are quite common in the market. However, will anyone be familiar with variance swaps on swap rates in the market? Are they ...
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Variance swap = delta hedged strip of options
Is there a paper that explicitly shows/demonstrates that a variance swap can be replicated by delta-hedging a strip of options?
Thus far I have not found anything: papers mention it in passing ...
user34971
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Margin requirements for OTC variance swaps
It is not clear for me the mechanism of margin requirements for OTC variance swaps.
I don't see in supplementary information to OTC Swaps the rules of margin maintenance or initial margin or ...
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