Volatility Swap

Volatility swaps are cash-settled OTC forward contracts on future realised volatility. They give traders an ability to trade pure volatility, going long underpriced volatility or shorting overpriced volatility to profit as vol normalises to fair value. The payoff of a volatility swap is the gap between realised volatility (calculated daily or at expiry) and the volatility strike agreed at contract initiation (in dollars per vol point) multiplied by the swap’s notional value.