Variance Swap (Settlement)
Computes the settlement of a variance swap: the variance notional multiplied by the difference between the realized variance and the variance strike (the square of volatility). It's the pure volatility derivative — unlike an option, it has no directional exposure to the asset, only to the variance that actually occurred. The buyer profits if the market swings more than expected. Enter the realized volatility, the strike volatility and the variance notional.
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Variance Swap (Settlement)
Computes the settlement of a variance swap: the variance notional multiplied by the difference between the realized variance and the variance strike (the square of volatility). It's the pure volatility derivative — unlike an option, it has no directional exposure to the asset, only to the variance that actually occurred. The buyer profits if the market swings more than expected. Enter the realized volatility, the strike volatility and the variance notional.
Betting on volatility, pure
What if you could bet directly on how much a market will swing, regardless of direction? The variance swap does exactly that. It's not an option: at expiry, it simply exchanges the variance that actually occurred for the variance agreed at the start, the strike. The buyer profits if the market is more turbulent than expected.
The settlement is the variance notional multiplied by the difference between the realized variance and the square of the strike volatility. By paying on the square of volatility, the variance swap has an elegant mathematical property that allows it to be replicated exactly with a portfolio of options, which made it the standard instrument for trading volatility.
Enter the period's realized volatility, the contracted strike volatility and the variance notional. The tool returns the settlement result. Remember the exposure is convex: being on the square, gains from high volatility grow faster than losses from low volatility.
Related Tools
Volatility Swap (Settlement)
Computes the settlement of a volatility swap: the volatility notional multiplied by the difference between the realized volatility and the strike, in volatility points. It's a cousin of the variance swap, but pays linearly in volatility, not its square, which makes it more intuitive yet harder to replicate. The difference between the two fair strikes is the convexity adjustment. Enter the realized volatility, the strike volatility and the volatility notional.
Implied Volatility (Black-Scholes)
Computes the implied volatility of a European call option by inverting the Black-Scholes formula via bisection: given the market price, it finds the volatility the model would need to reach it. It's the volatility the market is actually pricing in, the number behind the volatility smile and the VIX. Unlike the other Greeks, it has no closed form and requires a numerical solution. Enter the spot price, the strike, the interest rate, the term and the market price of the call.
Par Swap Rate
Computes the par swap rate from discount factors: the fixed rate that makes the interest rate swap's value zero at inception, equating the fixed and floating legs. The formula is (1 − last discount factor) divided by the sum of discount factors weighted by the period. It's a swap's market quote and the basis for marking existing positions to market. Enter the list of discount factors by payment date and the year-fraction of each period.
The results provided by this tool are for general informational and educational purposes only and do not constitute professional, financial, medical, legal, tax or accounting advice. Always confirm important decisions with a qualified professional and official sources.