Variance Swap Replication

Discrete or Continuous?

Journal article (2018)

Authors

F.L.Y. Le Floch Calypso Technology, Numerical Analysis - EEMCS
Research Group
Numerical Analysis (EEMCS) (TU Delft)
Copyright: © 2018 F.L.Y. Le Floch
DOI: https://doi.org/10.3390/jrfm11010011
More Info
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Published Date

2018

Language

English

Faculty

Electrical Engineering, Mathematics and Computer Science

Department

Delft Institute of Applied Mathematics

Research Group

Numerical Analysis

Abstract

The popular replication formula to price variance swaps assumes continuity of traded option strikes. In practice, however, there is only a discrete set of option strikes traded on the market. We present here different discrete replication strategies and explain why the continuous replication price is more relevant.