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rmeenaks
Topic Author
Posts: 186
Joined: May 1st, 2006, 2:31 pm

### Volatility Forwards? Do they exist...

Hi,I am currently researching on volatility derivatives and I have found all different types (swaps, futures, options, etc), but could not find anything on forward contracts. Yes, I am a newbie in this topic . Can someone help me out or point me to a paper??Thanks,Ram;

Alan
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Joined: December 19th, 2001, 4:01 am
Location: California
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### Volatility Forwards? Do they exist...

swap = forwardregards,

rmeenaks
Topic Author
Posts: 186
Joined: May 1st, 2006, 2:31 pm

### Volatility Forwards? Do they exist...

Thanks for the response, but if you look at it that way, isnt the futures and swaps both forward contracts. Or is the swap really is a forward contract in the NORMAL (non-portfolio of forwards) sense...Thanks,Ram

Alan
Posts: 10163
Joined: December 19th, 2001, 4:01 am
Location: California
Contact:

### Volatility Forwards? Do they exist...

Here is the way I think about it.A conventional forward contract on an asset S(t) is an agreement todeliver S(T) at time T > t for a fixed strike K. The strike is chosen so there isno initial cash flow -- hence, the initial value of the contract is zero. The terminalvalue of the contract is S(T) - K. There are no other cash flows (-unlike- a future).Now consider how you would generalize this contract idea to create a forward ona path-dependent payoff like an Asian payoff, which is an average asset value overa time period. The payoff is P(T) = Sum S(t_i)/n, where t < t(1) < t(2) , ..., t(n) <= T. P(T) is the realized average value over (t,T). The agreement would be to deliver P(T) at time T > t for a fixed strike K. (times a notional if you like). The strike is chosen so there is no initial cash flow, so the initial value of the contract is zero. The terminalvalue of the contract is P(T) - K. There are no other cash flows.This same idea works for a variance swap, which is simply another path-dependent payoff.Now the payoff is P(T) = Sum [log S(t_i)/S(t_i-1)]^2/n. Thestrike K is set for no cash flow again. The terminal value is P(T) - K, where P(T)is now the realized variance over (t,T).The quick version of the above:swap = forward.

AHeyman2
Posts: 17
Joined: July 13th, 2005, 3:57 pm

### Volatility Forwards? Do they exist...

right but doesn't a variance swap reprice itself based on realized vol? I think he was refering to a future based on implied vol... like vix futures...

bskilton81
Posts: 159
Joined: December 16th, 2004, 8:30 pm

### Volatility Forwards? Do they exist...

Variance swaps are not necessarily forwards. Variance swaps are based on realized versus implied vols, whereas forward volatility agreements are forwards on implied volatility. Forward vol agreements are traded in FX markets. At maturity of the forward, it settles into an ATM Forward straddle (Long ATM forward put, long ATM forward call).
Last edited by bskilton81 on February 7th, 2007, 11:00 pm, edited 1 time in total.