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Forward Volatility Contract Pricing in the Brazilian Market

Author

Listed:
  • Jorge C. Kapotas

    (Octaplus Financial Analytics)

  • Pedro Paulo Schirmer

    (Instituto de Matemática e Estatística, Universidade de São Paulo)

  • Sandro Magalhães Manteiga

    (Deutsche Bank MaxBlue)

Abstract

In this work we consider the pricing of a special class of volatility derivatives, the so-called variance swaps. The fair value of a variance swap is equal to the expected value of the realized variance of the underlying of the swap during the lifetime of the contract. It is shown how this expected value can be computed by means of an exotic option with logarithmic pay-off. We show how to statically replicate this pay-off in terms of a basket of synthetic vanilla call and put options. We apply this construction to the TNLP4 ticker of BOVESPA and synthetize a basket with pure exposure to volatility using actual market prices.

Suggested Citation

  • Jorge C. Kapotas & Pedro Paulo Schirmer & Sandro Magalhães Manteiga, 2004. "Forward Volatility Contract Pricing in the Brazilian Market," Brazilian Review of Finance, Brazilian Society of Finance, vol. 2(1), pages 1-21.
    • Handle: RePEc:brf:journl:v:2:y:2004:i:1:p:1-21
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    More about this item

    Keywords

    IVOL; volatility derivatives; variance swaps; forward volatility; VOI; VIX;
    All these keywords.

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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