Variance swap

A variance swap is a financial derivative that allows investors to trade future variability (or volatility) of an underlying asset's price without having to deal directly with the asset itself. Unlike traditional options, which pay off based on price movements, a variance swap settles on the variance of the underlying asset's price returns. ### Key Components of a Variance Swap: 1. **Underlying Asset**: Variance swaps can be based on various assets, including stocks, indices, or other financial instruments.