Variance Swap Replication: Discrete or Continuous?
7 Pages Posted: 22 Feb 2015 Last revised: 17 Mar 2015
Date Written: March 15, 2015
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.
Keywords: variance swap, volatility, derivatives, replication, finance
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