Volatility Swap Pricing Calculator

Estimate fair volatility levels with blended variance inputs. Review payouts, discounting, and sensitivities using clean visuals and practical trading fields.

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Calculator Inputs

This model blends realized variance and forward variance, then applies optional convexity and premium adjustments to estimate fair volatility and present value.

Plotly Graph

Example Data Table

Case Strike Vol % Realized Vol % Forward Vol % Elapsed Fraction Vega Notional Contracts Indicative PV
Base Trade 24.00 22.00 25.00 0.35 10,000 1 1,234.80
Rich Forward Vol 20.50 19.10 27.80 0.20 25,000 3 15,742.65
High Observed Vol 18.25 31.50 28.00 0.65 12,500 2 29,180.40
Below Strike Scenario 26.00 21.30 22.40 0.50 8,000 5 -12,950.20

Formula Used

1) Blended expected variance

Weighted Variance = (Elapsed Fraction × Realized Vol²) + (Remaining Fraction × Forward Vol²)

2) Fair volatility estimate

Fair Vol = √(Weighted Variance) + Convexity Adjustment

3) Adjusted fair volatility

Adjusted Fair Vol = Fair Vol + Premium Adjustment

4) Expected payoff per contract

Expected Payoff = Vega Notional × (Adjusted Fair Vol − Strike Vol)

5) Present value

Present Value = Expected Payoff × e−(r−q)×Remaining Years

This is a practical desk-style calculator, not a full replication engine from option strips. It is useful for education, screening, and quick valuation comparisons.

How to Use This Calculator

  1. Enter the contract strike volatility in annualized percentage terms.
  2. Provide observed realized volatility for the completed portion of the deal.
  3. Enter forward volatility for the remaining period of the swap.
  4. Set elapsed fraction to reflect how much contract life has passed.
  5. Enter the vega notional and number of contracts.
  6. Use optional convexity and premium adjustments for desk assumptions.
  7. Submit the form to see fair volatility, payout, and discounted present value.
  8. Export the output as CSV or PDF for sharing or recordkeeping.

FAQs

1. What does a volatility swap pay?

A volatility swap usually pays vega notional multiplied by realized volatility minus strike volatility. Positive value appears when realized volatility finishes above the strike.

2. Why blend realized and forward volatility?

Before maturity, part of the contract is already observed and part remains uncertain. Blending both sections gives a practical estimate of fair volatility today.

3. What is convexity adjustment here?

Volatility swaps are sensitive to the square-root relationship between volatility and variance. A convexity adjustment approximates that effect when using variance-based market views.

4. Is this the same as a variance swap?

No. A variance swap settles on realized variance, while a volatility swap settles on realized volatility. Their notionals and pricing adjustments differ.

5. Why include dividend yield?

Dividend yield can affect discounting choices and carry assumptions in practical pricing workflows, especially when aligning with equity derivatives valuation conventions.

6. What does override fair volatility do?

It lets you replace the model-estimated fair volatility with your own market-implied or trader-supplied level. This is useful for scenario testing.

7. Can I use this for live trading?

Use it as a screening and educational tool. Live trading should also consider replication inputs, liquidity, jumps, holidays, conventions, and risk controls.

8. What does break-even realized volatility mean?

It is the realized volatility level that roughly offsets the strike after any premium adjustment. Around that point, payoff approaches zero.