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