An aversion to variance

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Variance swaps have proven tricky beasts to risk manage. These instruments grant investors a payout equal to the difference between realised variance and a pre-agreed strike level, times the vega notional. But because variance is the square of volatility, an unpredictable trading environment can have dramatic effects on variance positions. As a consequence, bad bets on variance have led to significant losses for users in the past. Towards the end of 2008, they struck once again. After September'

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