A variant on variance swap that allows investors to take a view on future variance swap rates rather than bet on realized variance against implied variance as a typical variance swap does. The first spot fixing in a standard variance swap is usually at inception of the trade or following two days, while in a forward variance swap, the first fixing is set at some future time to cater for investors willing to hedge a forward volatility exposure that originates from a variety of exotic options which significantly depends in their performance on forward volatility instead of backward-looking or implied volatility calculations.

This swap is instrumental for situations where a firm needs to hedge a forward volatility exposure that originates from a compound, installment, forward start, cliquet or other exotic option with a significant forward volatility dependence. Examples of exotic options which are sensitive to forward volatility include: compound options, cliquet options, forward-start options, among others.