Multi-Asset Stochastic Local Variance Contracts
New York University (NYU) - Courant Institute of Mathematical Sciences
Peter M. Laurence
University of Rome I - Department of Mathematics; Courant Institute, NYU
September 22, 2010
Mathematical Finance, Vol. 21, Issue 1, pp. 21-52, 2010
Variance swaps now trade actively over-the-counter (OTC) on both stocks and stock indices. Also trading OTC are variations on variance swaps which localize the payoff in time, in the underlying asset price, or both. Given that the price of the underlying asset evolves continuously over time, it is well known that there exists a semirobust hedge for these localized variance contracts. Remarkably, the hedge succeeds even though the stochastic process describing the instantaneous variance is never specified. In this paper, we present a generalization of these results to the case of two or more underlying assets.
Number of Pages in PDF File: 32
Keywords: variance swap, basket option, stochastic volatilityAccepted Paper Series
Date posted: December 30, 2010
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