What Is a Variance Swap and How Is It Typically Settled?
A Variance Swap is a forward contract on the future realized variance (or volatility) of an underlying asset. It allows a party to trade the future level of volatility directly.
Since variance is not a deliverable asset, Variance Swaps are always cash-settled. The payoff is based on the difference between the agreed-upon strike variance and the realized variance over the contract's life.
Glossar
Variance Swaps
Volatility ⎊ Variance swaps represent a forward contract on realized variance over a specified period, enabling participants to isolate and trade volatility exposure independent of directional price movements within cryptocurrency markets.
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.
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.
Variance Swap
Instrument ⎊ A variance swap is a financial instrument designed to provide pure exposure to the realized variance of an underlying asset.
Future Realized Variance
Measurement ⎊ Future Realized Variance is the actual, observable measure of the price dispersion of a crypto asset over a specified future period, calculated as the sum of squared logarithmic returns of the underlying asset's price movements.
Strike Variance
Dispersion ⎊ ⎊ Strike variance, within the context of cryptocurrency options and financial derivatives, quantifies the difference between implied volatility across various strike prices for a given expiration date.