More than You Ever Wanted to Know about Volatility Swaps (But Less than Can Be Said)

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Date:

02-03-2004
Vendor:

Goldman Sachs Group
Registration:

Required
Type:

Whitepapers
File size:

Not specified
Format:

PDF, Acrobat Reader
Pages:

Not specified

Publisher’s description

In this report we explain the properties and the theory of both variance and volatility swaps, first from an intuitive point of view and then more rigorously. The theory of variance swaps is more straightforward. We show how a variance swap can be theoretically replicated by a hedged portfolio of standard options with suitably chosen strikes, as long as stock prices evolve without jumps. The fair value of the variance swap is the cost of the replicating portfolio. We derive analytic formulas for theoretical fair value in the presence of realistic volatility skews. These formulas can be used to estimate swap values quickly as the skew changes.

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More than You Ever Wanted to Know about Volatility Swaps (But Less than Can Be Said)