Pricing and hedging of long dated variance swaps under a 3/2 volatility model

• Leunglung Chan ^[1] ; Eckhard Platen ^[2]
  1. [1] University of New South Wales (Australia)
  2. [2] University of Technology, Sydney (Australia)
• Localización: Journal of computational and applied mathematics, ISSN 0377-0427, Vol. 278, Nº 1 (15 April 2015), 2015, págs. 181-196
• Idioma: inglés
• DOI: 10.1016/j.cam.2014.09.032
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• Resumen

  • This paper investigates the pricing and hedging of variance swaps under a 3/2 volatility model using explicit formulae. Pricing and hedging is performed under the benchmark approach, which only requires the existence of the numéraire portfolio. The growth optimal portfolio is used as numéraire together with the real world probability measure as pricing measure. This real world pricing concept provides minimal prices for variance swaps even when an equivalent risk neutral probability measure does not exist.