Abstract:

(Volatility and Variance Swaps) Volatility is a measure of the risk or uncertainty and it has an important role in the financial markets. In recent times, institutional and individual investors have shown an increased interest in volatility as an investment vehicle. The derivatives instruments which allow investors to trade on volatility are volatility swaps and variance swaps. A volatility swap is a forward contract that pays off an amount proportional to the difference between the realized volatility over a specific period of time and the contractual volatility. Similarly, a variance swap is a forward contract on future realized variance. These swaps can be used to speculate on future volatility, to trade the spread between realized and implied volatility, or to hedge the volatility exposure of other positions. Following the growing of the over-the-counter market of variance and volatility swaps, volatility and variance futures and option contracts have starting to trade in exchanges.

Keywords: