A closed-form expansion approach for pricing discretely monitored variance swaps

Abstract

Variance swaps are among the most useful tools for derivatives trading and risk management. For pricing discretely monitored variance swaps under a general class of jump–diffusion models, we propose a closed-form expansion based on the length of monitoring interval. Our method relies on an iterative application of the Dynkin formula, which is usually called the operator method in financial econometrics. Numerical examples are given for demonstrating the efficiency of the method.