An agreement between a seller and a buyer to exchange a Straddle option on a given expiration date. On the trading day, counterparties determine both the expiration date and volatility. On the expiry date, the exercise price is set on the Straddle`s at the cash futures value on that date. In other words, the forward volatility agreement is a futures contract on the realized volatility (implied volatility) of a given underlying, whether it is a stock, a stock market index, a currency, an interest rate or a commodity index. etc. Because the underlying random variables are independent for non-overlapping time intervals, the variance is additive (see variance). For annual hourly discs, we considered annualized volatility to be special for FX, but I think it`s a general question. any good reference would be appreciated. VAFs are not mentioned in Derman`s paper (“More than you ever wanted to Know about volatility swaps”) In order to facilitate calculation and obtain non-recursive representation, we can also directly express volatility in advance as spot volatilities: Advance volatility is a measure of the implied volatility of a financial instrument over a future period. extracted from the conceptual volatility structure (which refers to the difference between the implied volatility of associated financial instruments with different maturities). I think the underlying idea is that the future ATM IV is a proxy for expected future volatility.
However, ATM IV, Spot or Future, is not a good proxy for expected volatility when there is a significant correlation between the underlying and volatility. Variance is the square of the differences in the measures from the mean divided by the number of samples. The standard deviation is the square root of the variance. The standard deviation of the continuous composite returns of a financial instrument is called volatility. This option is used to commit to implied volatility in advance and usually resembles trading a longer option and cutting your gamma exposure with another option, whose expiration date matches the departure date in advance, constantly rebalancing yourself, so that you are gamma-flat. FVA has nothing to do with Volswaps. It is synonymous with volatility agreement and you agree to a contract to buy/sell a vanilla forward starting option with black Scholes parameters (except for the spot price) that have been set today….