On the pricing and hedging of volatility derivatives
AbstractThe paper considers the pricing of a range of volatility derivatives, including volatility and variance swaps and swaptions. Under risk-neutral valuation closed-form formulae for volatility-average and variance swaps for a variety of diffusion and jump-diffusion models for volatility are provided. A general partial differential equation framework for derivatives that have an extra dependence on an average of the volatility is described. Approximate solutions of this equation are given for volatility products written on assets for which the volatility process fluctuates on a timescale that is fast compared with the lifetime of the contracts, analysing both the 'outer' region and, by matched asymptotic expansions, the 'inner' boundary layer near expiry.
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Bibliographic InfoArticle provided by Taylor and Francis Journals in its journal Applied Mathematical Finance.
Volume (Year): 11 (2004)
Issue (Month): 4 ()
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Web page: http://taylorandfrancis.metapress.com/link.asp?target=journal&id=100141
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- Windcliff, H. & Forsyth, P.A. & Vetzal, K.R., 2006. "Pricing methods and hedging strategies for volatility derivatives," Journal of Banking & Finance, Elsevier, vol. 30(2), pages 409-431, February.
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OFRC Working Papers Series
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- Neil Shephard & Ole E. Barndorff-Nielsen, 2005. "Variation, jumps, market frictions and high frequency data in financial econometrics," Economics Series Working Papers 240, University of Oxford, Department of Economics.
- Giovanni Salvi & Anatoliy V. Swishchuk, 2012. "Modeling and Pricing of Covariance and Correlation Swaps for Financial Markets with Semi-Markov Volatilities," Papers 1205.5565, arXiv.org.
- Nicolas Merener, 2009. "Swap Rate Variance Swaps," Business School Working Papers 2009-02, Universidad Torcuato Di Tella.
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