Journal of Computational Finance
ISSN:
1460-1559 (print)
1755-2850 (online)
Editor-in-chief: Christoph Reisinger
Efficient pricing and super-replication of corridor variance swaps and related products
Need to know
- The authors consider weighted variance contracts such as corridor and conditional variance swap.
- Efficient super replication constructed using only a finite set of option maturities.
- Numerical and theoretical analysis of the hedging error.
Abstract
We consider weighted variance contracts in which the realized variance is subjected to a spot-dependent weighting function, a notable example of which is the corridor variance swap. Such payouts admit a quasi-static hedge involving European-style options, with expiries at all dates up to the maturity of the contract. This paper proposes a method for overhedging weighted variance using only a finite number of maturities. Moreover, this approach is shown to have good convergence properties and allows one to treat dividends in a natural way. As an application, the method is used to relate corridor variance with the variance implicit in the definition of the HSI Volatility Index.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
