Hedging Volatility Swaps with Straddles and Variance Swaps

Summary

The discussion points to two practical approaches for hedging volatility swaps. For forward-starting swaps, it cites a method that uses straddles at a particular strike, with hedge notional linked to the volatility skew at that strike. For non-forward-starting swaps, it points to nonparametric hedging with variance swaps in stochastic-volatility models.

The document does not derive either hedge, explain its assumptions, or report performance results. It also raises the broader question of static, semi-static, and dynamic hedging and mentions robust replication as relevant background, but gives no summary of that work. The cited methods are leads for further study rather than a complete implementation guide, and the applicability of the proposed hedges depends on the swap structure and model setting described in the underlying papers.

Key ideas

• A cited approach hedges forward volatility swaps with straddles at a selected strike.
• The forward-swap hedge notional is tied to the volatility skew at that strike.
• A separate cited method uses variance swaps to hedge non-forward volatility swaps in stochastic-volatility models.
• The document does not provide derivations, assumptions, or comparative hedge results.

Tags

# Volatility swap hedge


# Volatility swap hedge












What are the hedging methods for volatility swap (rather than variance swap)? What are the possibilities of setting up a static, semi-static or dynamic hedging?

I am aware of but have not yet read through Peter Carr and Roger Lee's paper Robust Replication of Volatility Derivatives. Please do reiterate the points you think is essential from that paper.

## Answer by user34971 (score 3, accepted)

https://quant.stackexchange.com/a/44645

Here is a practical hedge for forward volatility swaps using only straddles with a certain strike, and with a notional that is determined by the skew at that magic strike. The same method for spot/seasoned volatility swaps will be posted online in due course as well.

Frido Rolloos, Model-Free Pricing and Hedging of Forward Starting Volatility Swaps.

## Answer by user34971 (score 4)

https://quant.stackexchange.com/a/50623

Apologies for the delay on the hedging of non-forward-starting volatility swaps, but it's only since this week that I have an answer for this.

The link below gives the hedge. My contact details are at the bottom of the title page if you have questions.

Nonparametric Hedging of Volatility Swaps with Variance Swaps in StochasticVolatility Models by Frido Rolloos.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.