Tradition-Icap, the world's leading voice broker and electronic platform for the trading of interdealer currency options, today announced the launch of tradable volatility swaps ('Volswaps') on its Volbroker FX Options platform.
A volatility swap provides pure exposure to the volatility of an asset, with the payout determined by the difference between the traded volatility level and the realised volatility. The first fully electronic trade - in AUDUSD - has already been successfully transacted.
Electronic trading in Volswaps is now available to participants in nine major currency pairs - USDJPY, EURJPY, AUDJPY, EURUSD, AUDUSD, GBPUSD, EURGBP, USDCHF and USDCAD - with additional pairings to be added in due course.
Commenting on the launch, Terry Benson, C.O.O. Tradition-ICAP, said: "Electronic trading of Volswaps has been designed to meet the developing requirements of market participants in a sector where liquidity is key. It is very much aligned with Tradition-ICAP's core belief of creating products with market participants' input, and we already have support from a number of major clients.
"The initiative is gaining traction each day and represents a great opportunity in the strikeless market. With the success of the vanilla market, we see many customers wanting to trade volatility without the hassle of having to gamma trade and ultimately deal with the strike, as seen in the equity markets. Volswaps are perfect instruments for creating baskets, hedging spot sensitive exotics, trading actuals and other similar products. Placing Volswaps on an electronic dealing platform like Volbroker allows for greater transparency in the market."
A volatility swap provides pure exposure to the volatility of an asset
It is a forward contract upon the realised volatility of the underlying price
A Volswap is quoted in terms of percentage volatility
At the end of the contract, the payout is determined by the difference between the traded volatility level and the realised volatility. Therefore, at the end of the contract, if the realised volatility is higher than the traded level, the buyer of the Vololswap receives the difference. If the realised Vol is lower, the buyer pays the difference
Volatility swaps are traded in amounts per 1% of volatility, known as vega face amount