Model independent hedging strategies for variance swaps
AbstractA variance swap is a derivative with a path-dependent payoff which allows investors to take positions on the future variability of an asset. In the idealised setting of a continuously monitored variance swap written on an asset with continuous paths it is well known that the variance swap payoff can be replicated exactly using a portfolio of puts and calls and a dynamic position in the asset. This fact forms the basis of the VIX contract. But what if we are in the more realistic setting where the contract is based on discrete monitoring, and the underlying asset may have jumps? We show that it is possible to derive model-independent, no-arbitrage bounds on the price of the variance swap, and corresponding sub- and super-replicating strategies. Further, we characterise the optimal bounds. The form of the hedges depends crucially on the kernel used to define the variance swap.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1104.4010.
Date of creation: Apr 2011
Date of revision: May 2011
Contact details of provider:
Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-30 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ian Martin, 2011. "Simple Variance Swaps," NBER Working Papers 16884, National Bureau of Economic Research, Inc.
- Robert Jarrow & Younes Kchia & Martin Larsson & Philip Protter, 2013. "Discretely sampled variance and volatility swaps versus their continuous approximations," Finance and Stochastics, Springer, vol. 17(2), pages 305-324, April.
- Haydyn Brown & David Hobson & L. C. G. Rogers, 2001. "Robust Hedging of Barrier Options," Mathematical Finance, Wiley Blackwell, vol. 11(3), pages 285-314.
- B. Acciaio & M. Beiglb\"ock & F. Penkner & W. Schachermayer & J. Temme, 2012. "A trajectorial interpretation of Doob's martingale inequalities," Papers 1202.0447, arXiv.org, revised Jul 2013.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).
If references are entirely missing, you can add them using this form.