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Webcast: Volatility Trading - Does a variance swap have a delta?

Speaker: Dr Simon Acomb

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A course on this topic is available in London Time Zone, New York Time Zone and Singapore Time Zone

Webcast Agenda

  • Overview of who trades volatility and why
  • Introduction of a variance swap as a basic tool for trading volatility
  • Discussion on how and when a variance swap has a delta

Learning Outcomes

  • Understand a variance swap as a linear product for trading variance
  • Appreciate the role of discretization of returns on the behaviour of variance swaps
  • Comprehend the difference between sticky strike and sticky moneyness volatility dynamics and the impact on hedging of variance swaps


1. Is there a market impact from the delta hedging of variance swaps?
A. Yes. Most hedge funds sell realized volatility and received the fixed strike. This means that the investment banks hedging these positions are all "one-way". The interesting thing about the delta due to discretization of time in a variance swap is that this delta disappears on the close of the markets. As a consequence all investment banks will be closing out any intraday delta on the close of business which can move markets.

2. Do the same issues on whether a variance swap has a delta also apply to volatility swaps?
A. Yes. Volatility swaps can have a delta due to the discretization of time and due to volatility surface dynamics in exactly the same way as a variance swap. However, volatility swaps are far more difficult instruments for investment banks to hedge. This is because variance swaps has a replicating portfolio of (infinitely many) European options, whilst this is not the case for volatility swaps.

3. Are the terms for a variance swap standardized?
A. Yes and no. Some parts of the contract are fairly standard, such as daily observations on the close, and what to do in the case of the exchange being shut. However, there are a number of variants on the standard contract. Some variance swaps trade with an embedded cap. On equities, some contracts adjust for dividends and others do not.

Thank you to those attendees who submitted their questions.

LFS offers the 3-day 'Volatility: Trading and Managing Risk' programme with Dr Simon Acomb in London.

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