Abstract
Swaps are useful for volatility hedging and speculation. Volatility swaps are forward contracts on future realized stock volatility, and variance swaps are similar contracts on variance, the square of future volatility. Covariance and correlation swaps are covariance and correlation forward contracts, respectively, of the underlying two assets. Using change of time method, one can model and price variance, volatility, covariance, and correlation swaps. Keywords: volatility swaps; variance swaps; Heston model; stochastic volatility; covariance swap; correlation swap; proceedings of the sixth PIMS industrial problems solving workshop; dependent variable: log returns of; Canada Index Prices; method: ML-ARCH; included observations: 1,300; convergence achieved after; observations
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