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Static Replication of Forward-Start Claims and Realized Variance Swaps

Jan Baldeaux and Marek Rutkowski

Applied Mathematical Finance, 2010, vol. 17, issue 2, 99-131

Abstract: The goal of this work is to examine the static replication of path-dependent derivatives such as realized variance swaps, using more standard products such as forward-start binary (i.e. digital) double calls and puts. We first examine, following Carr and Madan (2002), the static replication of path-independent claims with continuous and discontinuous payoff functions. Subsequently, the static replication of forward-start claims with payoffs given by a bivariate function of finite variation is examined. We postulate that certain forward-start binary (or barrier) options are traded. The work concludes by an application of our general results to the static hedging of a realized variance swap with forward-start binary (or barrier) options.

Keywords: Static replication; realized variance swap; binary option; barrier option (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (4)

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DOI: 10.1080/13504860903075621

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Handle: RePEc:taf:apmtfi:v:17:y:2010:i:2:p:99-131