OTC-Like Volatility / Vega Conventions

An OTC-like variance futures contract is quoted in volatility points. When trades in those contracts are consummated intraday on day n at a price in volatility points (σ_*) the trade is immediately acknowledged but not cleared until the end of day observation of the index value is received. At that point, the trade price in volatility points is converted to variance units using the following formula and cleared and restated to trade participants:

Equation 3 is an end-of-day translation of the intraday consummated trade price in an OTC-like variance futures contract where the nth day variance in the accrued variance portion reflects the current day return, which cannot be computed until the end-of-day index closing value is observed.

An OTC-like variance futures contract uses vega units to express a trade size. Taking the partial derivative of Equation 3 with respect to the traded price in volatility points (σ_*) yields the unit vega. Dividing a target trade vega by unit vega yields a target trade size in variance units:

Equations 3 and 4 summarize volatility and vega translations that occur at the end of the day for an OTC-like variance futures contract.