Traditionally, investors gain exposure to the market’s volatility through standard call and put options, derivatives that also depend on the price level of the underlying asset. By trading derivatives on variance and volatility, investors can take views on the future realized volatility directly. The simplest such instruments are variance and volatility swaps. A volatility swap is a forward contract on future realized price volatility. Similarly, avariance swap is a forward contract on future realized price variance, variance being the square of volatility. In both cases, at inception of the trade, the strike is usually chosen such that the fair value … Continue reading VARIANCE AND VOLATILITY SWAPS