Credit variance swaps surface

Variance swaps have emerged in the credit derivatives market, giving traders a tool to gain exposure to the future level of volatility in credit indexes. Last month, Credit Suisse and London-based hedge fund Solent Capital Partners, executed a credit variance swap referenced to one of the European iTraxx indexes.

The payout of the swap is equal to the notional multiplied by the difference between the realised variance of the index and a pre-agreed variance strike. The size of the trade, the