A Forward Volatility Agreement between a seller and a buyer to trade a Straddle option on a given expiration date. On the trading day, counterparties determine both the expiration date and volatility. On the expiry date, the exercise price is set on the Straddle`s at the cash futures value on that date. In other words, the forward volatility agreement is a futures contract on the realized volatility (implied volatility) of a given underlying, whether it is a stock, a stock market index, a currency, an interest rate or a commodity index. etc. A startup volatility swap is actually a swap on realized future volatility. In another thread, I wrote that Rolloos & Arslan wrote an interesting paper on price reconciliation without a Model spot Starting Volswap. Looking at FX in particular, but I think it`s a general question. any good reference would be appreciated. It also allows investors to speculate or express views on the level of volatility in the future.
In fact, trade volatility is higher than Delta hedging, which uses options to get views on the future direction of volatility. In terms of sensitivity, this is similar to that of forward/var start swaps, as you currently have no gamma and are exposed to forward flight. However, it is different from the fact that you are exposed to Standard Vega distortions of vanilla options and MTMs due to distortions, given that the spot moves away from the initial trading date. I think the underlying idea is that the future ATM IV is a proxy for expected future volatility. However, ATM IV, Spot or Future, is not a good proxy for expected volatility when there is a significant correlation between the underlying and volatility. .