Variance Swaps in BM&F: Pricing and Viability of Hedge

Richard John Brostowicz Junior () and Márcio Laurini
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Richard John Brostowicz Junior: Global Modelling Analytics Group - Credit Suisse

Brazilian Review of Finance, 2010, vol. 8, issue 2, 197-228

Abstract: A variance swap can theoretically be priced with an infinite set of vanilla calls and puts options considering that the realized variance follows a purely diffusive process with continuous monitoring. In this article we willanalyze the possible differences in pricing considering discrete monitoring of realized variance. It will analyze the pricing of variance swaps with payoff in dollars, since there is a OTC market that works this way and thatpotentially serve as a hedge for the variance swaps traded in BM&F. Additionally, will be tested the feasibility of hedge of variance swaps when there is liquidity in just a few exercise prices, as is the case of FX optionstraded in BM&F. Thus be assembled portfolios containing variance swaps and their replicating portfolios using the available exercise prices as proposed in (DEMETERFI et al., 1999). With these portfolios, the effectiveness of the hedge was not robust in mostly of tests conducted in this work.

Keywords: Variance Swaps; Realized Variance; Hedge (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:brf:journl:v:8:y:2010:i:2:p:197-228

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