Variance swaps

Equity volatility backlash

Taking a long equity volatility position is a favourite macro hedge for risk managers and traders across asset classes, but the trade doesn’t always work as expected. How has the volatility experienced in May and June affected macro hedging? Joel Clark…

Return to variance?

Banks and investors were hammered on short single-stock variance positions during the crisis, causing many dealers to pull back from the variance swap market altogether. Instead, some have been pushing volatility swaps as an alternative, but not everyone…

Return to variance?

Banks and investors were hammered on short single-stock variance positions during the crisis, causing many dealers to pull back from the variance swap market altogether. Instead, some have been pushing volatility swaps as an alternative, but not everyone…

An aversion to variance

As volatility spiked in late 2008, variance swaps contributed to huge bank losses, particularly in single stocks. Some dealers have now stopped quoting single-stock variance swaps, while activity in the broader market has been scaled back. Mark Pengelly…

Smile dynamics III

In two articles published in 2004 and 2005 in Risk, Lorenzo Bergomi assessed the structural limitations of existing models for equity derivatives and introduced a new model based on the direct modelling of the joint dynamics of the spot and the implied…

Smile dynamics III

In two articles published in 2004 and 2005 in Risk, Lorenzo Bergomi assessed the structural limitations of existing models for equity derivatives and introduced a new model based on the direct modelling of the joint dynamics of the spot and the implied…

Variance swaps under no conditions

Conditional variance swaps are claims on realised variance that is accumulated when the underlying asset price stays within a certain range. Being highly sensitive to movements in both asset price and its variance, they require a very reliable model for…

Variance swaps and non-constant vega

Variance swaps have gained in popularity due to their ability to provide investors with purevolatility exposure – a fairly stable gamma exposure despite changes in the value of theunderlying. The vega exposure of this product, however, varies linearly…

Smile dynamics II

In an article published in Risk in September 2004, Lorenzo Bergomi highlighted how traditionalstochastic volatility and jump/Lévy models impose structural constraints on the relationshipbetween the forward skew, the spot/volatility correlation and the…

Corridor variance swaps

This article studies a recent variation of a variance swap called a corridor variance swap (CVS). For this swap, returns are not counted in the realised variance calculation if the reference index level is outside some specified corridor. CVSs allow…

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