Variance Swap Replication: Discrete or Continuous?

Fabien Le Floc’h
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Fabien Le Floc’h: Numerical Analysis, TU Delft, 2628 Delft, The Netherlands

JRFM, 2018, vol. 11, issue 1, 1-15

Abstract: 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; quantitative finance (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2018
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