A variance swap involves parties agreeing to make cash payments based on whether the realised variance – the square of the volatility – of a stock or an index over a specified period is more or less than an agreed level. The buyer of a variance swap receives a payment if realised variance is higher or lower than the agreed level. The swap provides a trader with constant exposure to volatility with a fixed gamma and time decay that is not dependent on stock prices.
“Dealers now have the ability to trade index and share variance swaps in addition to index options, index swaps, index basket swaps, share options, share swaps and share basket swaps on US underliers,” said Isda.
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