Static Replication of Forward-Start Claims and Realized Variance Swaps
AbstractThe goal of this work is to examine the static replication of path-dependent derivatives such as realized variance swaps, using more standard products such as forward-start binary (i.e. digital) double calls and puts. We first examine, following Carr and Madan (2002), the static replication of path-independent claims with continuous and discontinuous payoff functions. Subsequently, the static replication of forward-start claims with payoffs given by a bivariate function of finite variation is examined. We postulate that certain forward-start binary (or barrier) options are traded. The work concludes by an application of our general results to the static hedging of a realized variance swap with forward-start binary (or barrier) options.
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Bibliographic InfoArticle provided by Taylor and Francis Journals in its journal Applied Mathematical Finance.
Volume (Year): 17 (2010)
Issue (Month): 2 ()
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Web page: http://taylorandfrancis.metapress.com/link.asp?target=journal&id=100141
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