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hilss


Total Posts: 68
Joined: Jun 2007
 
Posted: 2021-03-23 18:01
This might be too simplistic, and i'm sure there's a flaw in my logic, but I would like your feedback please.

I'm trying to use ES options to produce the VIX futures prices.
1) I fit the ES option prices (I should using SPX by definition, but don't have access to SPX) via a vol model.
2) I use the vol model to produce the variance swap price.
3) Now I have a variance swap term structure (expiration x-axis and total variance on y-axis).
4) Since I don't have the Wednesday expiration, I interpolate the total variance and produce the 30-day forward variance (starting on the VIX expiration date).
5) I convert this to annualize vol.

when I do this, I constantly underestimate the VIX future prices.

Many thanks,
hilss


kloc


Total Posts: 42
Joined: May 2017
 
Posted: 2021-03-24 07:11
This is never going to work - VIX futures are *expectation* of future VIX. Remember: E(sqrt(Variance)) != sqrt(E(Variance)).


hilss


Total Posts: 68
Joined: Jun 2007
 
Posted: 2021-03-24 11:31
Thanks Kloc !!! Would it be safe to assume that this would be ok to compute forward variance?

kloc


Total Posts: 42
Joined: May 2017
 
Posted: 2021-03-24 14:59
You mean get market expectation of fwd variance as a forward starting var swap? Yes, variances are additive, you can use this approach for fwd variances.

However, same caveats apply like like in the case of pricing var swaps via underlying option portfolios...

hilss


Total Posts: 68
Joined: Jun 2007
 
Posted: 2021-03-24 15:39
understood... makes sense.
thank you very much
hilss
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