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CuriousCalcDude
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Posts: 21
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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eqderiv
Posts: 66
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.
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