Efficient Pricing and Super Replication of Corridor Variance Swaps and Related Products PDF Download

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Efficient Pricing and Super Replication of Corridor Variance Swaps and Related Products

Efficient Pricing and Super Replication of Corridor Variance Swaps and Related Products PDF Author: Christoph Burgard
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Languages : en
Pages : 25

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Book Description
We consider weighted variance contracts in which the realised variance is subjected to a spot dependent weighting function, a notable example of which is the corridor variance swap. Such payouts admit a quasi-static hedge involving European style options with expiries at all dates up to the maturity of the contract. This note proposes a method for over-hedging weighted variance using only a finite number of maturities. Moreover this approach is shown to have good convergence properties and allows one to treat dividends in a natural way. As an application the method is used to relate corridor variance with the variance implicit in the definition of the HSI volatility index.