Volatility swap

Volatility swap

In finance, a volatility swap is a forward contract on the future realised volatility of a given underlying asset. Volatility swaps allow investors to trade the volatility of an asset directly, much as they would trade a price index.

The underlying is usually a foreign exchange (FX) rate (very liquid market) but could be as well a single name equity or index. However, the variance swap is preferred in the equity market due to the fact it can be replicated with a linear combination of options and a dynamic position in futures.

ee also

*Variance swap
*Volatility (finance)
* [http://www.derivativesstrategy.com/magazine/archive/1998/0498shrt.asp Prepackaged Volatility Plays]


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