In a RIVET-backed futures contract, the traded volatility strike is converted to a futures price and the notional vega of the trade is converted to variance futures.  During this conversion process, a pricing adjustment is made to correct for the differing economics created by differences in collateral flow and margin payments.  Also, both the traded volatility strike and notional vega are adjusted for the realized variance from the contract’s inception date until the trade day.  Once converted, the result is a standardized, spot starting, variance future that replicates the payoff streams from different OTC swap transactions.

 

	OTC Variance Swap	RIVET™ Backed Future
Price negotiated in	Volatility	Volatility
Size negotiated in	Vega	Vega
Start convention	Spot Starting	Spot Starting
End convention	Option Expiration date	Option Expiration date
Price of Instrument	Present Value of Swap	Futures Price* --  Present Value of Swap w/ standard strike

*adjusted for return on variation margin

5-Year Variance Swap (Simulation)