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Model-independent hedging strategies for variance swaps
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Hobson, David and Klimmek, Martin (2012) Model-independent hedging strategies for variance swaps. Finance and Stochastics, Vol.16 (No.4). pp. 611-649. doi:10.1007/s00780-012-0190-3 ISSN 0949-2984.
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Official URL: http://dx.doi.org/10.1007/s00780-012-0190-3
Abstract
A variance swap is a derivative with a path-dependent payoff which allows investors to take positions on the future variability of an asset. In the idealised setting of a continuously monitored variance swap written on an asset with continuous paths, it is well known that the variance swap payoff can be replicated exactly using a portfolio of puts and calls and a dynamic position in the asset. This fact forms the basis of the VIX contract.
But what if we are in the more realistic setting where the contract is based on discrete monitoring, and the underlying asset may have jumps? We show that it is possible to derive model-independent, no-arbitrage bounds on the price of the variance swap, and corresponding sub- and super-replicating strategies. Further, we characterise the optimal bounds. The form of the hedges depends crucially on the kernel used to define the variance swap.
Item Type: | Journal Article | ||||
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Subjects: | H Social Sciences > HG Finance | ||||
Divisions: | Faculty of Science, Engineering and Medicine > Science > Statistics | ||||
Library of Congress Subject Headings (LCSH): | Derivative securities -- Econometric models, Hedging (Finance) -- Econometric models | ||||
Journal or Publication Title: | Finance and Stochastics | ||||
Publisher: | Springer | ||||
ISSN: | 0949-2984 | ||||
Official Date: | October 2012 | ||||
Dates: |
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Volume: | Vol.16 | ||||
Number: | No.4 | ||||
Page Range: | pp. 611-649 | ||||
DOI: | 10.1007/s00780-012-0190-3 | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access | ||||
Date of first compliant deposit: | 23 December 2015 | ||||
Date of first compliant Open Access: | 23 December 2015 |
Data sourced from Thomson Reuters' Web of Knowledge
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