The Information Content of Implied Co-Volatility and Co-Variance Swap
This paper discusses quanto spread trading strategy and introduces a simple model that allows the co-variance to be implied from the quanto spread. A synthetic co-variance swap is then constructed with the implied co-variance as the fixed rate. This paper also provides an empirical analysis over the period spanning January 2005 through December 2010. Our empirical findings suggest that the proposed co-variance swap is fair to both the buyer and the seller, which is consistent with the evidence that the implied co-volatility can forecast future co-volatility.
quanto futures, covariance, covolatility, CME Nikkei
Finance and Financial Management
Review of Futures Markets
Kent State University
The Information Content of Implied Co-Volatility and Co-Variance Swap. (2013). Review of Futures Markets. 21, (1), 49-75. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/3423