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Equity Variance Swap

Trade Type: VarianceSwap
Trade Components: None

An Equity Variance Swap has a payoff that depends on the volatility of an underlying equity instrument. Underlying individual stocks and indices are supported. The swap counterparties agree to exchange a pre-agreed variance level (the strike) for the actual amount of variance realized over an observation period.

The strike is typically set at ATM so the swap initially has zero value. If the subsequent realized volatility is above the strike level, the buyer of a variance swap who is long volatility will have a positive NPV, and the seller who is short volatility, will have a negative NPV.

This example is long position in the volatility of the S&P index with a strike at 20%.