Page 175 - PRIAA Glossary

VARIANCE OPTION
An option that uses the variance of an underlying’s price movement over a period as the basis for determining whether or not the option will be exercised.
VARIANCE SWAP
A forward that uses the variance (being the volatility squared) of an underlying’s price movement over a period as the basis for the payoff calculation.
VARIANCE SWAP DISPERSION
A structure in which one party sells a variance swap on
an index and simultaneously buys individual variance swaps on each of the index constituents. The buyer of this structure will be in-the-money if the index components are negatively correlated.
VARIANCE-COVARIANCE/PARAMETRIC VARIANCE
An analytical method of measuring value at risk (VaR) which assumes a lognormal (or normal) distribution of returns for risk factors affecting the price of a security. If there is more than one risk factor, then the relationship between the risk factor variables is given in the variance/covariance matrix.
VARIATION MARGIN
The profits or losses on open positions that are calculated daily in the mark-to-market process and then paid/credited.
VEGA
The rate of change in price of a derivative with respect to the change in volatility for the underlying instrument, keeping all other factors constant.
The equation below illustrates the mathematical formulation for vega, where V is the value of the option and σ is the volatility:
∂V v = ∂σ
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V