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Variance Swap

Definition

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.

What is 'Variance Swap'

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

Explaining 'Variance Swap'

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.


Further Reading


The term structure of variance swap rates and optimal variance swap investments
www.jstor.org [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 …

The effect of jumps and discrete sampling on volatility and variance swapsThe effect of jumps and discrete sampling on volatility and variance swaps
www.worldscientific.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 …

Prices and asymptotics for discrete variance swapsPrices and asymptotics for discrete variance swaps
www.tandfonline.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 …

Variance risk premiumsVariance risk premiums
academic.oup.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 …

The term structure of variance swaps and risk premiaThe term structure of variance swaps and risk premia
papers.ssrn.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 …

How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returnsHow does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns
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 …

Testing for jumps when asset prices are observed with noise–a “swap variance” approachTesting for jumps when asset prices are observed with noise–a “swap variance” approach
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 …

GARCH and volatility swapsGARCH and volatility swaps
www.tandfonline.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 …



Q&A About Variance Swap


What does "linear" mean in this context?

Linear means that it rises at an equal rate for each percentage point increase in the underlying index or asset.

What is a variance swap?

A variance swap is a type of volatility swap where the payout is linear to variance rather than volatility.

How does the payout of a variance swap differ from that of a volatility swap?

The payout will rise at a higher rate than volatility.

Why would you use a variance swap over another kind of derivative?

Because it has larger payouts than other types of derivatives, such as options and futures contracts.