Volatility/Variance Swaps

[qazmax]

Anyone know of a trading desk making markets in OTC variance and volatility swaps.

Anyone know the common type of estimation technique which is used for these contracts? E.g. linear extrapolation, cubic slpine etc...

 

[energytraderus]

Volatility is the square root of variance. Why would anyone trade variance?

 

[nononsense]

Quote from energytraderus:

Volatility is the square root of variance. Why would anyone trade variance?

To make money.

 

[dont]

It has to do with hedging. Variance swaps can be hedged by using an option with a LN(x) payoff rather than a linear one. Basically variance swaps are easy to hedge volatility swaps now thats a different story

 

[science_trader]

Quote from dont:

It has to do with hedging. Variance swaps can be hedged by using an option with a LN(x) payoff rather than a linear one. Basically variance swaps are easy to hedge volatility swaps now thats a different story

Exactly. Have a look at that paper for more insight.
http://www.ederman.com/new/docs/gs-volatility_swaps.pdf