What is variance swap?
A variance swap is a financial derivative used to hedge or speculate on the magnitude of a price movement of an underlying asset. These assets include exchange rates, interest rates, or the price of an index. In plain language, the variance is the difference between an expected result and the actual result.
What is the difference between a variance swap and a volatility swap?
Volatility swaps are forward contracts on future realized stock volatility. Variance swaps are simi- lar contracts on variance, the square of future volatility. Both these instruments provide an easy way for investors to gain exposure to the future level of volatility.
How do you hedge a variance swap?
The variance swap may be hedged and hence priced using a portfolio of European call and put options with weights inversely proportional to the square of strike. Any volatility smile model which prices vanilla options can therefore be used to price the variance swap.
Is variance and volatility the same?
Volatility is said to be the measure of fluctuations of a process. Volatility is a subjective term, whereas variance is an objective term i.e. given the data you can definitely find the variance, while you can’t find volatility just having the data. Volatility is associated with the process, and not with the data.
Does variance swap have Delta?
Yes. Volatility swaps can have a delta due to the discretization of time and due to volatility surface dynamics in exactly the same way as a variance swap.
What is the motivation to use variance swap?
Holders use variance swaps to hedge their exposure to the magnitude of possible price movements of underliers, such as exchange rates, interest rates. It is the opposite of a fixed rate., or an equity index.
Can retail traders trade variance swaps?
Can retail or individual traders trade them? Variance swaps are used by institutional traders. A retail or individual trader can trade volatility through options, but a pure volatility bet would involve hedging out the delta (directional) risk.
What does stock variance measure?
Variance is a measurement of the spread between numbers in a data set. Investors use variance to see how much risk an investment carries and whether it will be profitable. Variance is also used to compare the relative performance of each asset in a portfolio to achieve the best asset allocation.
Is Vol standard deviation or variance?
Volatility is Usually Standard Deviation, Not Variance Of course, variance and standard deviation are very closely related (standard deviation is the square root of variance), but the common interpretation of volatility is standard deviation of returns, and not variance.
Are variance swaps liquid?
Variance swaps offer straightforward and direct exposure to the volatility of an underlying asset. They are liquid across major equity indices and large cap stocks, and increasingly across emerging market indices and other asset classes.
What is a variance swap?
A variance swap is a derivative contract in which two parties exchange payments based on the underlying asset’s price changes, or volatility.
What is a’variance swap’?
What is a ‘Variance Swap’. A variance swap is a financial derivative used to hedge or speculate on the magnitude of a price movement of an underlying asset. These assets include exchange rates, interest rates, or the price of an index. In plain language, the variance is the difference between an expected result and the actual result.
Can You replicate a variance swap portfolio?
What is more, a replicating portfolio of a variance swap would require an entire strip of options, which would be very costly to execute. Finally, one might often find the need to be regularly rolling this entire strip of options so that it remains centered on the current price of the underlying security .
Are variance swaps a good way to hedge options?
Variance swaps are well suited for speculation or hedging on volatility. Unlike options, variance swaps do not require additional hedging. Options may require delta-hedging. Also, the payoff at maturity to the long holder of the variance swap is always positive when realized volatility is more significant than the strike.