Example - Accruing Realized Volatility

In this example we show the evolution of the P&L of a short SX5E variance swap through the accrual of realised variance, using prevailing market prices.

 

Maturity: 20 days

Strike: 16.5

Vega Notional = €100k    --> equivalent Variance Notional = €3,030

 

Over the 20-day period, realised volatility was 14.3%, 2.2% lower than the level of implied sold.

We would expect a P&L from the short position of €220k.

However, due to the convexity of the payout working against the short, the actual P&L is slightly less: €206,714. 

 

Example vs accrueing realised vol

 

This daily P&L pattern is common: short variance will profit modestly most of the time, but will lose heavily on large moves. 

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