# Fx Forward Volatility Agreement

Looking specifically at FX, but I think it`s a general question. any good reference would be appreciated. VAFs are not mentioned in Derman`s article (“More than you ever wanted to Know about volatility swaps”) In a very recent (quite compressed) working paper, I saw that Rolloos also derived a model-free price approximation for forward start-up volwaps: If I understand correctly, an FVA is a swap on future implied volatility to the currency hedged by an early-start ATM option/overlap. A forward start volatility swap is actually a volatility swap made in the future. In another thread, I wrote that Rolloos & Arslan wrote an interesting article about price approximation without a Model of Spot Starting Volswap. Agreement that a seller and a buyer enter into to exchange an overlapping option on a specific expiration date. On the day of the exchange, counterparties determine both the expiration date and volatility. On the expiry date, the strike price on the overlaps will be set at the future monetary value at that time. In other words, the forward volatility agreement is a futures contract on the realized volatility (implied volatility) of a particular underlying asset, whether it is a stock, stock market index, currency, interest rate or commodity index. etc.

I believe the underlying idea is that the future ATM IV is an indicator of expected future volatility. However, THE ATM IV, spot or forward, is not a good indicator of the expected volatility achieved if there is a significant correlation between the underlying asset and volatility. In terms of sensitivity, it is similar to Forward Starting Flight/Var exchanges in that you currently have no gamma and are exposed to a Forward Flight. However, it is different because you are exposed to the standard Vega deformations of vanilla options as well as MTM due to the tilt when the spot moves away from the original trading date. FVA has nothing to do with Volswaps. It stands for Forward Volatility Agreement and you enter into a contract to buy/sell a forward starting vanilla option with black Scholes parameters (excluding spot price) defined today. Trading volatility gives investors the opportunity to hedge the volatility risk associated with a derivative position against adverse market movements of the underlying asset(s). It also allows investors to speculate or take a position on the level of volatility in the future. In fact, trade volatility is higher than delta hedging, where options are used to take views on the future direction of volatility. This is used to get exposure to implied forward volatility and is usually similar to trading a longer-term option and reducing your gamma exposure with another option that matches the expiration date of the date and is constantly rebalanced so that you are flat gamma. The calculations in this last article look correct – but I haven`t seen any numerical tests of the result without a model yet.

Has anyone tested the latest Rolloos result, any comments/ideas about it?. . .