How Is the "Realized Variance" Calculated in a Variance Swap? ⎊ Path

How Is the “Realized Variance” Calculated in a Variance Swap?

The realized variance is calculated by summing the squared daily returns of the underlying asset over the contract's life and then annualizing this sum. The daily return is often the log return of the closing price.

This sum represents the actual volatility experienced by the underlying asset during the swap period.

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Glossar

Variance

Dispersion ⎊ In cryptocurrency, options, and financial derivatives, variance quantifies the degree to which returns deviate from their expected value, representing the inherent uncertainty within an asset’s price movements.

Realized Variance

Metric ⎊ This measures the actual squared volatility of the underlying cryptocurrency asset over a defined historical period, providing an empirical anchor for forward-looking volatility estimation.