variance swaps

Discussion in 'Options' started by straddle_me, Jul 8, 2005.

  1. Any variance swap traders out there?

    what is 'shadow delta' vs plain delta on a variance swap. i assume it has something to do with the way the payout is calculated on the swap and each daily fixing.

    how are variance swaps normally hedged? do you really buy/sell the whole strip of vanilla's against it, or just some parts of the curve, or atm straddles, etc...?

    i'm hearing of trading put spreads against them; would you delta hedge those options, or ride them out against the variance?

  2. Variance swaptions. Hedging with strip-vol would require a ridiculous amount of capital to effect.
  3. that's what i thought. i guess most speculators would just take their view, execute the swap and let it ride, maybe put on a few straddles if they want to hedge or play the skew.

    but how would a market-maker hedge a variance swap? let's say he makes a market (bid-offer), how does he ensure that he won't lose money on the trade (i understand no guanrantees...) if he doesn't want to hold the side he takes versus the client?
  4. Pricing is a function of hedging-efficiency, so you can imagine these are wide-markets. A call or put swaption into your exposure, but that would require another market to be made. It's a difficult price-discovery, as there is no consensus on what to use... Heston > StochVol > [many others] and the things aren't traded in continuous-time. No time and sales on these. ;)

    You could price the variance-vols directly from the liquid underlying and use a vanilla model.
  5. sle


    actually, they can be hedged statically in options and dynamically in underlying. in essense, you are creating a inverse log-like payoff profile using a collection of options (easy for a market-maker these days, as everyone wants to sell wings) and you hedge the delta exposure. i'll send you a pm with more details.