How Fixing Frequency Affects a Volatility Swap’s Fair Strike

Summary

The document raises two questions about a volatility swap under a flat one-year volatility assumption with no skew: whether the fair volatility equals the quoted volatility when the number of fixings matches the stated annualization factor, and why the fair volatility might be lower if the number of fixings increases while that factor stays unchanged.

It contains no answer, derivation, or empirical evidence, so it does not establish either claim or explain the intuition mathematically. It serves as a prompt about the relationship between sampling frequency, annualization, and the expected realized volatility measure used to value a swap. A complete analysis would need to specify the swap’s payoff and variance or volatility convention, the return sampling and annualization rules, and the model assumptions. The stated Black–Scholes setting alone does not resolve these details in the text.

Key ideas

• The document asks whether a volatility swap’s fair strike equals the quoted volatility under matching fixing and annualization counts.
• It asks why using more fixings might lower the fair volatility when the annualization factor is unchanged.
• No answer or mathematical argument is provided, so the proposed relationship remains unverified.
• The valuation question depends on the payoff definition, sampling convention, and annualization method.

Tags

# Volswap: fair strike and number of fixings


# Volswap: fair strike and number of fixings












Let’s assume 1y vol is at 10.0% and there is no skew and the term structure is flat. Let’s assume there are 252 fixings and the annualisation factor is 252.

1) In a BS world, is it correct to say that the fair vol is then 10%?

2) If the number of fixings is actually 260 i/o 252, then the fair vol is lower: what’s the intuition behind it and would you have an elegant mathematical way to prove it?

Thank you everyone in advance.

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