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Joined: August 22nd, 2002, 11:28 pm

VOL and VAR Swaps

October 12th, 2002, 5:19 am

I need urgent help with something: how are vol and var swaps marked to market?I have the following formulas:N x (Volset - Vol realized) Short Vol SwapN x (Volset^2 - Volrealized^2)Short Variance SwapVar=Vol^2I also have the formula for a Zero mean variance Swap. Its the square root of A, times the Sqaure root of the (sum(sigma) of the natural log of P at time T+1 / P at time T )^2 all divided by T which equals the number of days. Now, this provides historical vol. Now, how do you unwind a Short Var Swap? How is it valued on a daily basis? My main observation is this: SPX 3m implied vols about 5 days ago was around 34%. And when we use the formula above we calculate the VOL realized for the period to be 26%, however, implied vols during the period actually jumped up to 46%. Now, if I use the Nx (Vol set^2 - Volrealized^2) formula above, the trade would be in the green, no??? but when I consider that implied vol has actualy gone up, then if this trade has to be reversed it would be closed at a loss, right? I cant find enough information on this and I already have the Emanuel Derman articles. PLEASE COMMENT.....thank you ahead of time....
Last edited by CuriousCalcDude on October 11th, 2002, 10:00 pm, edited 1 time in total.
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Joined: July 14th, 2002, 3:00 am

VOL and VAR Swaps

October 14th, 2002, 7:42 am

Attached is a research paper, which may be of some use to you: Derivatives on Volatility.A good place for finding research papers on a wide variety of topics is SSRNTyping in variance or volatility will show you documents relating to these subjects.

PW by JB has been "Serving the Quantitative Finance Community" since 2001. Continued...

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