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Hi,I would to know if implied volatility derivatives exist (in practice and/or theorically) and, if yes, to get some references. The classical answer I obtain is: "There are derivatives on the VIX". But, if I well understand the CBOE's article, the VIX is more a realised variance index than an implied volatility index since it is constructed as a sum of variance swap. Thanks

Where are you getting that the VIX is a realized variance index? The VIX is calculated off of the implied vols of the front two months of S&P 500 index options.

Hi,My references for the construction of the VIX index are:CBOE White Paper and Tale of Two Indices, Carr and WuAccording the 'new methodology' (2004), the VIX is constructed in the same way that a variance swap, i.e. thanks to a log-profile.

QuoteOriginally posted by: spigeols the VIX is constructed in the same way that a variance swap.The new VIX is the fair price at time t of a variance swap from t to t+T. Therefore it is an market-expectation or implied concept.Those who enter into this swap and hold it until t+T will have a P&L based on the realized.These are two very different things.QuoteOriginally posted by: spigeols the VIX is more a realised variance index than an implied volatility indexIt is purely an implied index.

The white paper referenced near the top of the CBOE VIX site:http://www.cboe.com/micro/vix/introduction.aspxshould remove any remaining confusion about how the index is calculated (Pages 3-8 incl).

spigeols,options on VIX are options on forward variance swaps (the VIX is a rolling variance 1m swap).All the best

What about forward vol agreements in FX, where you simply for example bet on what 3m USDJPY vol should be 1 month from now, this is pure implied vol bet, basically a forward starting option. A pure FVA is cash settled, but where should it be settled, what screen should be used? various bank's have different contracts here. To make sure u get fair price at fixing (expiry) u are in general best off by requiring physical delivery of straddle (FVA with physical option delivery) at last day (then spot delivery, 2 days most currencies) bough sold at vol you agreed on...then u in my opinion have more flexibility, u can now find best bid (or offer) in market if u want to get rid of it...or even keep the straddle if fit's your book...FVA's trade quite actively in FX, most but not all large banks quote them... and many only for limited size...otm FVA's with physical deliverd options are very interesting, where u are guaranteed to for example get delivered 15% delta strangle at agreed implied vol at maturity....DVegaDVol could be important here, you have no delta, no gamma, no theta (well of course theta implicit in your "free" vega convexity, so yes some type of negative theta but not standard theta), but lots of vega and DvegaDvol.... very good for bets on stochastic implied vol! if skew flips can also have some interesting effects.... Not all FVA banks will quote you this product..

Thanks for the comments. Are the FVA traded only on the FX market or also on the equity market? Which model is commonly used to price and hedge these contracts (especially the OTM FVA)? Do you have references?

I have not seen a model for it, intuition about DvolDvega will get you far, remeber FVA's are delivered at Black-Scholes (Garman-Kohlehagen) option value against your agreed vol.... so this is basically trading elements of the Black-Scholes formula (not the model) with stochastic implied vol...I think FVA's only in FX