The evolution of variance

Dealers are creating a range of new variance-related products as investor interest in volatility products is burgeoning. But the jury is still out on whether instruments such as 'up-var' swaps and 'gamma' swaps will take off. By Christopher Jeffery

Liquidity of variance swaps – contracts where the cash payout is equal to the notional multiplied by the difference between the realised variance of the underlying and a pre-agreed variance strike over the life of the swap – has increased dramatically in the past nine months. "We believe the market for variance swaps is more than e1 billion in vega this year," says Richard Carson, Deutsche Bank's London-based global head of structured products trading. Vega measures the change in an