Variance Swap
An over-the-counter derivative that pays the difference between realized variance (the square of realized volatility) over a contract life and a strike variance set at trade time, scaled by a vega notional. Variance swaps are the institutional standard for expressing direct views on realized volatility because they avoid the roll mechanics of VIX futures and provide linear exposure to variance (vs. the convex exposure of options). They are OTC-only and institutional-only for most investors but underpin much of the structuring done in the vol-trading market.
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Related terms
American Option · Asian Option · Barrier Option · Basket Option · Butterfly Spread · Calendar Spread
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