Christy Funsch23



 

Forward Vol Agreement Replication

A starting start swap is really a swap swap on future volatility. In another thread, I wrote that Rolloos -Arslan wrote an interesting document on the approximation of prices without a Spot-Start-Volswap model. As I understand it, an FVA is a swap on the volatility of under-induced money in the future, which is ensured by a forward startup/straddle option. In a very recent (fairly condensed) discussion paper, I saw that Rolloos deduced a price approximation without a model for flightswaps before: this is used to increase exposure to implied volatility forward and is generally similar to trading with a longer option and cutting your gamma exposure with another option with the expiration of the front departure date, constantly rebalanced for you to be flat. In terms of sensitivity, it is similar to go-start-flight/var swaps because you have no gamma and you have exposure to the front flight. However, it is different that you are exposed to standard vega deformations of the vanilla and MTM options because of the tilt, as the spot moves away from the original trading date. FVA has nothing to do with Volswaps. This is Forward Volatility Agreement and you enter into a purchase/sale of a vanilla launch option in advance with black scholes settings (except spot price) that were set today. Especially as far as FX is concerned, but I think it`s a general question. any good reference would be appreciated. FVAs are not mentioned in Derman`s paper (“You never wanted to know more about volatility swaps” Mathematics in this last document looks good – but I haven`t yet seen numerical tests of results without a model.

Who tested rolloos` latest result, comments/ideas? I think the underlying idea is that the future ATM IV is a substitute for future volatility realized. But the ATM IV, spot or future, is not a good proxy for expected volatility, if there is a significant correlation between the underlying and volatility.