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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. 


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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. 


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