Variance Swap Replication
Discrete or Continuous?
Fabien Le Floch (Calypso Technology, TU Delft - Electrical Engineering, Mathematics and Computer Science)
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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.
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