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- Variance Swaps /
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- The contract
The contract
The strike of a variance swap represents the level of volatility bought/sold and is set at trade inception.
The strike is set according to prevailing market levels so that the swap initially has zero value.
If subsequent realised volatility > strike --> buyer of variance swap will be in profit.
If subsequent realised volatility < strike --> buyer of variance swap will be in loss.
A buyer of a variance swap is therefore long volatility.
Convention: variance swap strikes are quoted in terms of volatility, not variance.
The P&L of a variance swap is non-linear (convex) with volatility, although of course it is linear in terms of variance.
