Variance Swap

A variance swap is a derivative contract in which the buyer receives the difference between realised variance of an underlying asset and a pre-agreed fixed variance rate (the strike), multiplied by a notional amount — or pays if realised variance is below the strike. Unlike an options position, a variance swap provides pure exposure to volatility without delta risk, making it a clean instrument for expressing volatility views. The payoff is: (Realised Variance – Strike Variance) × Notional. Variance swaps are primarily OTC instruments used by institutional investors and hedge funds who want to trade volatility directly rather than through options delta-hedging. In India, variance swaps on Nifty 50 are used by foreign institutional investors and proprietary trading desks to hedge or speculate on overall market volatility levels without taking directional equity risk.