User:Objective3000/VolContracts

VolContract futures are financial instruments that capture the interday realized volatility of an underlying asset, index, or instrument. A patent was filed by Robert Krause on the idea in spring of 2000. In the summer of 2000, the concept was published in the Journal of Alternative Investments. VolContract futures differ from VIX futures in that the former are based on realized volatility and the latter are based on implied volatility. Euro FX VolContract futures currently trade on the CME Globex system in a licensing agreement with VolX Group, which controls the patent.

The below illustrative image is a quarterly complex chart of three 1-month and one 3-month Euro FX VolContract futures during the period of 7 February 2011 (from the very first listing date) to 3 June 2011 (to the very first quarterly expiration).

Realized Volatility
Often referred to as historical, or asset, volatility. The realized volatility of an asset is defined as the annualized standard deviation of the continuously compounded daily returns. The formula was further simplified by removing the mean and by using a constant annualization factor of 252 trading days regardless of the actual number of trading days in the year. It differs from implied volatility, which is derived from options premiums, and is commonly calculated via the Black-Scholes, Black model, or other option-pricing models.

Specifications
1-month VolContract futures (1Vol) and 3-month VolContract futures (3Vol) currently trade based on one underlying. The Company announced plans to roll out a 12-month VolContract futures (12Vol). Regardless of the time frame, the expiration value is calculated as the annualized standard deviation of interday log returns of the underlying asset over the Realized Volatility Period:

$$VOL = 100\sqrt{\frac{252}{n}\sum_{t=1}^n R_t^2}$$

Where Rt is the daily continuously compounded returns of the underlying futures, and n is number of business days in the Realized Volatility Period (“RVP”). Days where futures settlements are unavailable do not contribute to the calculation. The result is then multiplied by 100 (converts the decimal value to a whole number).

The RVP commences on the first business day after the previous month’s options expiration (in the case of a 1Vol) or of the previous quarter’s options expiration (in the case of a 3Vol). The period ends on the same day as the expiration date of the associated options. Calculating the RVP between options expirations allows for a direct hedge with the associated options. The number of trading days between options expiration is not constant because of calendar anomalies and holiday schedules. Therefore 1Vol is approximately one month and 3Vol is approximately three months. It should be noted that a 1Vol refers to the approximate 1-month period used in the calculation of the RVP and not the length of time the VolContract futures is listed. The VolContract futures is listed many months before the start of the RVP.

History

 * 1993 Realized volatility futures concept developed by Robert Krause.
 * 2000 Patent filed with the United States Patent and Trademark Office.
 * 2008 Patent granted for what would become VolContract futures.
 * 2009 The Volatility Exchange Corporation formed.
 * 2010 The Volatility Exchange Corporation entered a licensing agreement with CME Group to list VolContract futures based on the futures contracts on CME's currency pairs.
 * 2011 The first FX VolContract futures, based on the CME Group's Euro FX futures, began trading on 6 February 2011 (for trade date 7 February 2011).