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An engine swap is simply removing the carâs engine and replacing it with another. The basic idea of an engine is to increase the vehicleâs horsepower without the loss of dependability. An engine swap can also be performed if the existing engine in the car has failed.
The simplest such instruments are variance and volatility swaps. A volatility swap is a forward contract on future realized price volatility. Similarly, a variance swap is a forward contract on future realized price variance, variance being the square of volatility. In both cases, at inception of the trade, the strike is usually chosen such that the fair value of the swap is zero. This strike is then referred to as fair volatility or fair variance, respectively.