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Explanation:
A volatility swap pays based on the difference between a preagreed volatility strike and the realized volatility over the life of the swap.
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Q-178.7. With respect to a volatility swap, which of the following is TRUE?
A
VIX (CBOE volatility index) is branded but is functionally equivalent to a volatility swap
B
The payoff in a volatility swap is based on the difference between a fixed (preagreed) volatility and a realized, historical volatility
C
A volatility swap provides exposure to more risk factors than an option
D
A volatility swap is easier to value than a variance swap