Volatility Library

Published by: FINCAD
Date: 2008

“Rather than gaining exposure to the market’s volatility through standard call and put options, investors can take views on the future realized volatility directly by trading derivatives on variance and volatility. The simplest such instruments are variance and volatility swaps.

“A volatility swap is a forward contract on future realized price volatility. Similarly, a variance swap is a forward contract on future realized price variance, variance being the square of volatility. At expiry the receiver of the “floating leg” pays (or owes) the difference between the realized variance (or volatility) and the agreed upon strike. At inception the strike is generally chosen such that the fair value of the swap is zero. This strike is referred to as fair variance (or fair volatility).”

Full article: Link

Article by: Anatoliy Swishchuk
Published by: Journal of Energy Markets
Date: 8 Jun 2011

“This paper focuses on the pricing of variance and volatility swaps in the energy market. An explicit variance swap formula and a closed-form volatility swap formula (using the Brockhaus–Long approximation) for energy assets with stochastic volatility are found. These formulas follow the continuous-time generalized autoregressive conditional heteroskedasticity(1,1).GARCH.1; 1//model (meanreverting) or the Pilipovi´c one-factor model. A numerical example is presented for the AECO natural gas index.”

Full article (PDF): Link
Presentation (PDF): Link