FVA has nothing to do with Volswaps. This is Forward Volatility Agreement and you enter into a purchase/sale of a vanilla launch option in advance with black scholes settings (except spot price) that were set today. Especially as far as FX is concerned, but I think it`s a general question. any good reference would be appreciated. FVA is not mentioned in Derman`s document (“More than you ever wanted to know about volatility swaps”) In terms of sensitivity, it is similar to go-start-flight/var swaps, since you don`t have gamma and you have exposure in advance. However, it is different that you are exposed to standard vega deformations of the vanilla and MTM options because of the tilt, as the spot moves away from the original trading date. I think the underlying idea is that the future ATM IV is a substitute for future volatility realized. But the ATM IV, spot or future, is not a good proxy for expected volatility, if there is a significant correlation between the underlying and volatility. A starting start swap is really a swap swap on future volatility.
In another thread, I wrote that Rolloos -Arslan wrote an interesting document on the approximation of prices without a Spot-Start-Volswap model. An agreement between a seller and a buyer to exchange a Straddle option on a specified expiry date. On trading day, counterparties determine both expiry date and volatility. On the expiry date, the strike price is set on the straddle on the date of the money on that date. In other words, the prior Volatility Agreement is a futures contract on the realized volatility (implied volatility) of a certain underlying, whether it be equities, stock index, currencies, interest rates, commodities. Etc. In a very recent (fairly condensed) discussion paper, I saw that Rolloos deduced a price approximation without a model for flightswaps before: this is used to increase exposure to implied volatility forward and is generally similar to trading with a longer option and cutting your gamma exposure with another option with the expiration of the front departure date, constantly rebalanced for you to be flat. As I understand it, an FVA is a swap on the volatility of under-induced money in the future, which is ensured by a forward startup/straddle option. Transaction volatility allows investors to hedge volatility risks associated with a derivative position against unfavourable market movements of underlying/underlying assets. It also allows investors to speculate in the future or take a look at volatility levels. Indeed, commercial volatility is greater than Delta coverage, which uses options to cast views on the future direction of volatility. Home > Financial Encyclopedia > Derivatives > F > Forward Volatility Agreement Mathematics in this last document seems right – but I haven`t yet seen digital tests of results without a model.
Who tested the latest Rolloos result, comments/ideas on it?.