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Principles of Financial Engineering, 3rd Edition by Elsevier Science

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Chapter 15

Tools for Volatility Engineering, Volatility Swaps, and Volatility Trading

This chapter introduces tools for volatility engineering. First, we describe positions with volatility exposure based on options such as delta-hedged calls and straddles. We point out the sensitivity of such positions to variables other than volatility. Then, we move to pure variance products. We describe the replication and pricing of a variance swap. We distinguish volatility from variance instruments and highlight the role of convexity adjustments. The GFC affected the market for variance and volatility swaps and we describe how the GFC has affected the market for volatility trading.

Keywords

convexity adjustments; vega; variance swaps; variance trading; volatility ...

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