As a volatility derivative, it is an agreement (swap) that entails exchanging the realized volatility between the time of entering into the agreement and expiration date, based on a pre-determined fixed volatility. Actually, this swap is a forward contract on the future realized volatility of a specific underlying asset. Investors use volatility swaps in order to trade the volatility of a chosen asset without having to trade its price index as a whole. Also, such as swap allows investors to trade the spread between realized volatility and implied volatility.
A single period volatility swap is known as a realized volatility forward contract.
Comments