Variance

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Variance is a measure of the level of variation of an asset’s price over time. Even though volatility is the more commonly used term in the financial markets, an asset’s volatility is actually derived from its variance. An asset with high volatility is expected to move around more, in percentage terms, than a low-volatility asset.[1]

Variance contracts permit the trading of 'variance risk' -- the risk that the (squared) volatility of stock returns changes randomly over time. [2]

References

  1. Variance swaps and CBOE S&P 500 variance futures. CBOE Futures Exchange.
  2. An Economic Motivation for Variance Contracts. Social Science Research Network.