Variance swaps under no conditions

Conditional variance swaps are claims on realised variance that is accumulated when the underlying asset price stays within a certain range. Being highly sensitive to movements in both asset price and its variance, they require a very reliable model for pricing and risk-managing. Artur Sepp applies the Heston stochastic volatility model to derive closed-form solutions for pricing and risk-managing of such swaps

Conditional variance swaps are recent financial innovations that enhance flexibility in volatility trading and risk management. They allow investors to take exposure to future market skew and convexity, and are attractive for investors with specific market scenarios because they are a relatively inexpensive and flexible way to lock in funds. A recent article (Jung, 2006) indicates that there is growing interest in conditional and corridor variance swaps among hedge funds and proprietary desks.

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