Volatility Swap

DEFINITION of 'Volatility Swap'

A forward contract whose underlying is the volatility of a given product.

BREAKING DOWN 'Volatility Swap'

This is a pure volatility instrument allowing investors to speculate solely upon the movement of a stock's volatility without the influence of its price. Thus, just like investors trying to speculate on the prices of stocks, by using this instrument investors are able to speculate on how volatile the stock will be.