NuclearPhynance Archive

A working paper on model-free pricing of forward starting volatility swap:



https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3177299



Comments welcome of course.

We knew that fair vol swap is cost of gamma, and Rolloos & Arslan derived this in a few ways independently a couple years ago. Great to see this generalized to forward start! Thank you Frido.

Me thinks there could be a small error in the paper actually - so advise to not use it for now Will let forum know when/if corrected.



EDIT:

Paper has been corrected and available for download again at given SSRN link. Conclusion hasn't changed, just the derivation of it. But contact me if any questions/comments.

@frolloos



I am trying to play with the spot-starting version to imply var and vol swap strikes and getting results that make no sense. Do you mind pasting a numerical example?

Which of my scribbles are you referring to? The "Taylor made" paper only tells you to approximate the volstrike from the d2=0 strike, not the varswap strike. The "It takes three" stuff approximates both the volstrike and varswap strike from 3 pillar options. Are you referring to the latter?

It's the Takes Three paper, yes. I literally took 3 options from the Jan SPX expiration and tried to reproduce the calculation -ni.e. i take sensible vega/vanna/volga, but the matrix makes no sense.

I sent you the simple workbook I used. Have a look and let me / phorum know if still getting nonsensical results.