A variance swap is an over-the-counter financial derivative that allows one to speculate on or hedge risks associated with the magnitude of movement, i.e. volatility, of some underlying product, like an exchange rate, interest rate, or stock index.

A type of volatility swap where the payout is linear to variance rather than volatility. Therefore, the payout will rise at a higher rate than volatility

Variance is the square of standard deviation. Because of this, a variance swaps' payout will be larger than that of a volatility swap, as these products are based upon variance rather than standard deviation.

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www.sciencedirect.com [PDF]

… Munich, University of Piraeus, Vanderbilt University, the 2006 European Finance Association (EFA … the approximation errors inherent in the procedure of synthesizing variance swaps from vanilla … Furthermore, by having variance swap rates across several maturities, we can more …

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