Volatility/Variance Swaps

Discussion in 'Trading' started by qazmax, Jan 10, 2006.

  1. qazmax


    Anyone know of a trading desk making markets in OTC variance and volatility swaps.

    Anyone know the common type of estimation technique which is used for these contracts? E.g. linear extrapolation, cubic slpine etc...

  2. Volatility is the square root of variance. Why would anyone trade variance?
  3. To make money.
  4. dont


    It has to do with hedging. Variance swaps can be hedged by using an option with a LN(x) payoff rather than a linear one. Basically variance swaps are easy to hedge volatility swaps now thats a different story
  5. Exactly. Have a look at that paper for more insight.