Buying or Selling Correlation using Variance Swaps
1. Context
In this short video from FRM Part 2 curriculum, we explore how variance swaps can be used to construct a long or short exposure on correlation. It is essentially a vega neutral set of trades that we’re after, one which can gives us a long or short exposure to correlation without the hassles and need of delta hedging (something that correlation exposures using option based trades require). The details of the reading in which this topic appears are given below:
| Area | Market Risk |
| Reading | Some Correlation Basics: Properties, Motivation, Terminology |
| Reference | Gunter Meissner, Chapter 1. Some Correlation Basics: Properties, Motivation, Terminology In Correlation Risk Modeling and Management, (West Sussex, England: John Wiley & Sons, 2005). |