A correlation swap is a financial derivative that allows one to speculate on or hedge risks associated with the observed average correlation, of a collection of underlying products, where each product has periodically observable prices, as with a commodity, exchange rate, interest rate, or stock index. A Correlation Swap is an instrument that allows an investor to take … [Read more...]
Volatility Swap
A Volatility Swap is a forward contract whose underlying is the volatility of a given product. This is a pure volatility instrument allowing investors to speculate solely upon the movement of a stock's volatility without the influence of its price. Thus, just like investors trying to speculate on the prices of stocks, by using this instrument investors are able to speculate on … [Read more...]
Variance Swap Explained
A variance swap is a financial derivative that allows one to speculate on or hedge risks associated with the magnitude of movement, i.e. volatility, of some underlying product, like an exchange rate, interest rate, or stock index. A Variance Swap is a type of volatility swap where the payout is linear to variance rather than volatility. Therefore, the payout will rise at a … [Read more...]
Total Return Swap
A Total Return Swap is a swap agreement in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains. In total return swaps, the underlying asset, referred to as the reference asset, is usually an equity index, … [Read more...]
Forex Swap
A Forex swap is a type of foreign exchange swap consisting of two parts, completed at the same time. One part is a foreign exchange spot trade, and the other is a foreign exchange forward transaction. Forex swaps are most often used by investors for either hedging or speculation purposes. In finance, a forex swap (or FX swap) is a simultaneous purchase and sale of identical … [Read more...]