Pricing Volatility Referenced Assets

Alan De Genaro Dario ()
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Alan De Genaro Dario: Bolsa de Mercadorias & Futuros (BM&F) e Instituto de Matemática e Estatística (IME/USP)

Brazilian Review of Finance, 2006, vol. 4, issue 2, 203-228

Abstract: Volatility swaps are contingent claims on future realized volatility. Variance swaps are similar instruments on future realized variance, the square of future realized volatility. Unlike a plain vanilla option, whose volatility exposure is contaminated by its asset price dependence, volatility and variance swaps provide a pure exposure to volatility alone. This article discusses the risk-neutral valuation of volatility and variance swaps based on the framework outlined in the Heston (1993) stochastic volatility model. Additionally, the Heston (1993) model is calibrated for foreign currency options traded at BMF and its parameters are used to price swaps on volatility and variance of the BRL / USD exchange rate.

Keywords: asset pricing; volatility swap; stochastic volatility; Heston model; model calibration (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:brf:journl:v:4:y:2006:i:2:p:203-228

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