The evolution of variance

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Liquidity of variance swaps – contracts where the cash payout is equal to the notional multiplied by the difference between the realised variance of the underlying and a pre-agreed variance strike over the life of the swap – has increased dramatically in the past nine months. "We believe the market for variance swaps is more than e1 billion in vega this year," says Richard Carson, Deutsche Bank's London-based global head of structured products trading. Vega measures the change in an