Abstract
The popular replication formula to price variance swaps assumes continuity of traded option strikes. In practice, however there is only a discrete set of option strikes traded on the market. We present here different discrete replication strategies and explain why the continuous replication price is more relevant.
Highlights
Variance swaps contracts allow a buyer to receive the future realized variance of the price changes until a specific maturity date against a fixed strike price, paid at maturity
We show that the effect is not necessarily so small on one-year variance swaps and look comparatively at the effect of jumps on the volatility swap replication
We add the variance swap price obtained by continuous replication with an adaptive integration range, as well as with the range truncated to the interval spanned by discrete option strikes
Summary
Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel. Suggested Citation: Le Floc'h, Fabien (2018) : Variance swap replication: Discrete or continuous?, Journal of Risk and Financial Management, ISSN 1911-8074, MDPI, Basel, Vol. Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen. Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Received: 14 December 2017; Accepted: 5 February 2018; Published: 12 February 2018
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