Background

On the expiration date of a VA Futures contract, the final settlement value is computed according to the following formula and rounded to the nearest 0.01:

See the VA Futures Contract Specifications for additional detail on the components of the final settlement value formula.

Prior to the expiration date the fair value of a VA Futures contract is the time-weighted sum of the current realized variance and an estimate of forward variance using a measure of the market implied volatility as shown in Equation 2 below:

Equation 2 is applicable at the end of the day as the accrued day variance assumes n complete elapsed returns and N-n forward returns using an estimate of forward variance.

The following section presents an overview of OTC-like volatility and vega conventions for the purpose of introducing the analytics provided by the Variance Calculator for translating between the variance unit conventions used by the current VA Futures product and an OTC-like product that is quoted and trades in volatility and vega units.