Corridor Variance Swap

If the contract makes dividend adjustments (as typical for contracts on single stocks but not on indices), then the term inside the parentheses becomes log((Yn+Dn)/Yn−1), where Dn denotes the dividend payment, if any, of the nth period. Corridor variance swaps accumulate only the variance that occurs while price is in the corridor. The buyer therefore pays less than the cost of a full variance swap. Among the possible motivations for a volatility investor to accept this trade-off, and to buy up (or down) variance are the following. First, the investor may be bullish (bearish) on Y . Second, the investor may have the view that the market’s downward volatility skew is too steep (flat), making down-variance expensive (cheap) relative to up-variance. Third, the investor may be seeking to hedge a short volatility position that worsens as Y increases (decreases).