A financial product that belongs to a standalone and distinct class of products whose performance relates to the volatility of one underlying asset or more. Volatility products allow market participants to manage the “volatility risk” associated with such underlying assets or asset classes. A position taken in a volatility product will change in value depending on the changes in the expected volatility of the underlying product or product class. Such products, by nature, are correlated with the direction taken by the market on the short term.
Volatility may be used as underlying variable as is, or in its other form: variance (where variance is volatility squared). Given that, and depending on the measure of volatility used (implied volatility and realized volatility), volatility products may be classified into two main categories: implied volatility products and realized volatility products. Examples of the former include variance swaps and volatility swaps, and of the latter: VIX futures and futures on options.
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