Exact Pricing and Hedging Formulas of Long Dated Variance Swaps under a $3/2$ Volatility Model

Abstract

This paper investigates the pricing and hedging of variance swaps under a $3/2$ volatility model. Explicit pricing and hedging formulas of variance swaps are obtained under the benchmark approach, which only requires the existence of the numéraire portfolio. The growth optimal portfolio is the numéraire portfolio and used as numéraire together with the real world probability measure as pricing measure. This pricing concept provides minimal prices for variance swaps even when an equivalent risk neutral probability measure does not exist.

23 pages, 5 figures

References in corpus (1)

• The calculation of expectations for classes of diffusion processes by Lie symmetry methods

Cited by in corpus (3)

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