Go to Deriscope's documentation start pageVariance_Swap

*Variance Swap* is a Tradable that represents an agreement to exchange once at swap's maturity the realized annualized "variance"*V* of the daily price returns of some underlying against a predetermined fixed amount.

The word "variance" is enclosed in double quotes to signify that *V* is computed in a slightly different way than from what implied by the regular statistical definition of variance.

More precisely, the mean of the daily price returns is ignored, so that *V* is defined as follows:

*V = (A/n)Sum_over_i{ [R(i)]² }*

where

*A* is an annualization factor, typically equal to 252, required to transform the daily variance into annualized variance

*n* is the number of sampling points, or equivalently the number of dates - except the first - where the underlying price is recorded

*R(i)* is the natural logarithmic return defined as

*Ri = ln{ P(i)/P(i-1) }*

where

*P(i)* is the underlying price at the ith sampling date.

It turns out the payoff at maturity to the long holder of the swap equals *N(V-K)* where *K* is the so called "variance notional" and *K* is the strike.

The pricing methodology is specified in Model[Variance Swap]

The following QuantLib issues have been identified:

Issue::VarianceSwap_StartDateIgnored

Issue::VarianceSwap_MonteCarlo_WrongPathVol

Issue::VarianceSwap_OnlyPositiveStrike