A startup volatility swap is actually a swap on realized future volatility. In another thread, I wrote that Rolloos & Arslan wrote an interesting paper on price reconciliation without a Model spot Starting Volswap. I think the underlying idea is that the future ATM IV is a proxy for expected future volatility. However, ATM IV, Spot or Future, is not a good proxy for expected volatility when there is a significant correlation between the underlying and volatility. This option is used to commit to implied volatility in advance and usually resembles trading a longer option and cutting your gamma exposure with another option, whose expiration date matches the departure date in advance, constantly rebalancing yourself, so that you are gamma-flat. Volatility trading allows investors to hedge the volatility risk associated with a derivative position against adverse movements of the underlying/underlying. It also allows investors to speculate or express views on the level of volatility in the future. In fact, trade volatility is higher than Delta hedging, which uses options to get views on the future direction of volatility. An agreement between a seller and a buyer to exchange a Straddle option on a given expiration date. On the trading day, counterparties determine both the expiration date and volatility. On the expiry date, the exercise price is set on the Straddle`s at the cash futures value on that date. In other words, the forward volatility agreement is a futures contract on the realized volatility (implied volatility) of a given underlying, whether it is a stock, a stock market index, a currency, an interest rate or a commodity index. etc.
Looking at FX in particular, but I think it`s a general question. any good reference would be appreciated. FVAs are not mentioned in Derman`s paper („More than you ever wanted to Know about volatility swaps“) In terms of sensitivity, it is similar to forward Starting Vol/Var Swaps, since you currently have no gamma and you have exposure in Forward Vol. However, it is different from the fact that you are exposed to Standard Vega distortions of vanilla options and MTMs due to distortions, given that the spot moves away from the initial trading date. FVA has nothing to do with Volswaps. This is a volatility agreement and you agree to a contract to buy/sell a vanilla forward starting option with black Scholes parameters (except for the spot price) that have been set today. In a very recent (quite compressed) working paper, I saw that Rolloos also deduced a model-free pricing approach for Forward Starting Volswaps: From what I understand, an FVA is a swap on the future implied volatility of at-the-money, which is guaranteed by a DEA/Straddle option. The mathematics in this last work looks correct – but I have not yet seen numerical tests of the result without a model. Anyone tested the latest Rolloos result, any comment/ideas about it? Home > Financial Encyclopedia > Derivatives > F > Forward Volatility Agreement.
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