Introduction
The spike in equity volatility in May and June caused a few problems for hedge funds and proprietary trading desks. Believing volatility would remain stable or fall to historic lows, traders used variance swaps to short volatility. It's a trade that came back to bite them as equity markets plunged and volatility surged in mid-May.
Nonetheless, despite a very brief dry-up in liquidity, the variance swap market has remained pretty robust. Participation from a wider array of investors has driven
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