Variance Swaps
A variance swap is created with a volatility strike of 15. At expiration of a variance swap, realized volatility was 14. The value transferred between the counterparties is closest to the:
Correct!
Vega notional is the approximate change in the payout of the swap for a one unit change in volatility. In this case, the realized volatility is exactly one less than the strike, so the payout will closely approximate the vega notional.
For example, a CNY 90 million vega notional in this case would suggest a volatility notional of CNY 3 million, and a payout of:
> $$ N_{Variance} (\sigma^2 - X^2) = \text{ CNY } 3{,}000{,}000 (14^2 - 15^2) = \text{ CNY } -87{,}000{,}000$$.
This payout of CNY 87 million to the swap dealer is quite close to the vega notional of CNY 90 million. The difference is due to convexity.
Incorrect.
Volatility notional is only a multiplier in the payment calculation at expiration.
Not exactly.
The difference in squared volatility and the squared volatility strike is 24, and this is indeed used as a multiplier at expiration, but with volatility notional instead.
vega notional.
volatility notional.
vega notional multiplied by 24.
