Between volatility and variance

Banks and investors were hammered on short single-stock variance positions during the financial crisis, leading many dealers to withdraw from the variance swap market. The alternative that some have reverted to is the volatility swap, although this has not met with a universal welcome, writes Joel Clark

The phrase ‘return to simplicity’ has become something of a mantra in the over-the-counter derivatives industry over the past 18 months, but it may not remain that way for very long. Unprecedented market conditions certainly led dealers to shy away from the complex financial engineering that had previously characterised derivatives, but the return of calmer markets is causing some practitioners to reassess the degree of simplicity they are willing to accept.

This is particularly evident in equity