In a very current (fairly condensed) discussion paper, I saw that Rolloos also deducted a price approximation without a model for forward start-up flights-swaps: in terms of sensitivity, it looks like flight/var swaps starting forward, because you don`t have gamma at the moment and you`re exposed in front of flight. 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. 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. The (annual) volatility of a given price or asset price on a term beginning with t 0 – 0 `displaystyle t_{0}`0` corresponds to spot volatility for that underlying term for each term. Such a series of volatility is a structure of volatility concepts similar to the yield curve. Just as forward rates can be deducted from a yield curve, volatility at the front can be deducted from a given volatility structure. 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. According to the same reasoning, we usually get with t 0 < t t < T `displaystyle t_{0}<t<T` for forward volatility, which is seen at the t 0 `displaystyle t_{0}`: A start-down swap is really a 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. Volatility rates in the market for 90 days are 18% and 16.6% for 180 days. In our rating, we σ 0, 0.25 `displaystyle `sigma `0.0.25` – 18% and σ 0 , 0.5 `displaystyle `sigma “0,`,5` – 16.6% (one year as 360 days). We want to find the volatility of the front for the period beginning with day 91 and ending on day 180. With the above form and the t setting 0-0 `displaystyle t_{0}`, we get this is used to gain exposure to the front of implied volatility and is generally similar to trading with a longer option and cut your gamma exposure with another option with the expiration date, constantly rebalanced, so you`re flat gamma.
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