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Variance Swap Replication

Discrete or Continuous?

Journal Article (2018)
Author(s)

F.L.Y. Le Floch (Calypso Technology, TU Delft - Numerical Analysis)

Research Group
Numerical Analysis
Copyright
© 2018 F.L.Y. Le Floch
DOI related publication
https://doi.org/10.3390/jrfm11010011
More Info
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Publication Year
2018
Language
English
Copyright
© 2018 F.L.Y. Le Floch
Research Group
Numerical Analysis
Issue number
1
Volume number
11
Pages (from-to)
1-15
Reuse Rights

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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.