Variance Swap

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Variance Swap

A forward contract on the variance of a security. The variance is the square of the standard deviation. As a result, the payout on a variance swap is higher when the volatility increases. A variance swap allows the investor to speculate on volatility, just as a trader might speculate on the price of a stock; it is most advantageous when the volatility is or is expected to be high.
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References in periodicals archive ?
Jain, "The effect of jumps and discrete sampling on volatility and variance swaps," International Journal of Theoretical and Applied Finance, vol.
Guo, "Optimal variance swaps investments," IAENG International Journal of Applied Mathematics, vol.
of Calgary) introduces mathematical equations for modeling the price of swaps in the financial and energy markets with different stochastic volatilities, and presents a variance drift adjusted version of the Heston model which improves the market volatility surface fitting.The graduate textbook explores variance and volatility swaps for financial markets with underlying assets following the Heston model, the valuation of variance swaps for stochastic volatilities with delay, a semi-Markov modulated market consisting of a riskless bond and a risky stock, variance and volatility swaps for volatilities driven by fractional Brownian motion, and explicit option pricing of a mean-reverting asset in energy markets.
According to CBOE, The S&P 500 Variance futures contract, like over-the-counter variance swaps, allows users to trade the difference between the implied and realized variance of the S&P 500 Index.
CFE's futures contract will offer the same quoting conventions and economic performance of OTC variance swaps, while providing the advantages of exchange-traded contracts -- transparency, price discovery and counterparty clearing guarantees.
Variance swaps. Technical report, JP Morgan document.
Discrete and continuosly sampled volatility and variance swaps. Technical report, INFORMS annual conference.
They have removed the need for investors to trade volatility through variance swaps or futures".
To further examine the side effects of using the noisier [DELTA][c.sub.t], I consider variance swaps. In this forward contract, two counterparties agree to settle the difference between a floating variance [[sigma].sub.R.sub.2], which is realized over the life of the contract, and a fixed variance swap rate, [K.sup.2].
Zou, 1999, "A Guide to Volatility and Variance Swaps," Journal of Derivatives 6, 9-32.
Mr Parkes points a finger "variance swaps", arcane contracts based not on the way the market is going to move, but on how much it jumps about in either direction.
This has led to arcane derivatives knows as "variance swaps", bets, if you like, on the volatility of an investment.