A note on contracts on quadratic variation

Carl Lindberg

PLOS ONE, 2017, vol. 12, issue 3, 1-5

Abstract: Given a Black stochastic volatility model for a future F, and a function g, we show that the price of 1 2 ∫ 0 T g ( t , F ( t ) ) F 2 ( t ) σ 2 ( t ) d t can be represented by portfolios of put and call options. This generalizes the classical representation result for the variance swap. Further, in a local volatility model, we give an example based on Dupire’s formula which shows how the theorem can be used to design variance related contracts with desirable characteristics.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0174133

DOI: 10.1371/journal.pone.0174133

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