Buysiders Focus On Variance Structures Amid Vol Liquidity Spike Post Crisis

During the height of the global financial crisis in 2008, strategies that involved using variance swaps to access cheap convexity, as a way of managing carry costs, were under the radar—many of those variance swaps were liquidated far below fair value, while at the same time counterparty risk rose in importance. Looking ahead to how such strategies will perform should another crisis occur, the structure of these variance trades have changed amid the significant spike in liquidity in the volatility market over the last six years.