Abstract
In this paper, a general approach is presented to price forward-start variance swaps with discrete sampling times, based on the Heston (1993)’s two-factor stochastic volatility model. Using this approach we work out two analytical closed-form formulae for the price of forward-start variance swap with the realized variance being defined by the actual-return realized variance and the log-return realized variance, respectively. The main features of this new approach and the developed formulae as a result include: (1) treating the pricing problem of variance swaps with different definitions of discretely-sampled realized variance in a highly unified way; (2) easily obtaining analytical closed-form solutions for forward-start variance swaps with two popularly-used definitions of discretely-sampled realized variance; (3) enabling the investigation of some important properties of the forward-start variance swaps, utilizing the elegant and simple form of the obtained solutions. With these advantages, we believe that the approach can be applied to price variance swaps based on other stochastic volatility models as well.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
