Variance Swaps Under No Conditions
Risk Magazine, pp. 82-87, March 2007
12 Pages Posted: 1 Jun 2009
Date Written: January 23, 2007
Conditional variance swaps are claims on realized variance which is accumulated when the underlying asset price stays within a certain range. Being highly sensitive to movements in both asset price and its variance, they require a very reliable model for pricing and risk-managing. In this article we apply the Heston stochastic volatility model, which is by now a widely accepted pricing model in many markets, to derive closed-form solutions for pricing and risk-managing of conditional variance swaps.
Keywords: variance swap, conditional variance swaps, volatility derivatives, Heston model, stochastic volatility
JEL Classification: C00, G00
Suggested Citation: Suggested Citation