A variance swap in which the buyer (the long) receives, at maturity, the realized daily variance of the reference underlying security/ index weighted by the previous day’s closing price (that is, it is proportional to the underlying price or index reading). The realized variance is determined using the following formula:

Where: T is time to maturity, F_t is the variance of underlying price/ index at time t, F₀ is the variance of underlying price at time 0, S_t is the underlying price at time t, and S₀ is the underlying price at time 0.

Therefore, the buyer is exposed to its price path over the term of the swap. In other words, the buyer has path-dependent exposure to the variance of the underlying price or index reading. Index price weighted variance swaps are often less costly than standard/ vanilla variance swaps when the reference security/ index has a downward–sloping skew of implied volatility.

Index price-weighted variance swaps have many uses, including particularly the so-called equity dispersion trading (the volatility of a basket or index of securities is traded against the volatility of its components).

This swap is also referred to as a gamma swap or an price-weighted variance swap.