A note on the pricing and hedging of volatility
Sam Howison, A. Rafailidis, H.O.
We consider the pricing of volatility products and
especially volatility and variance swaps. Under risk-neutral valuation we
provide closed form formulae for volatility-average and variance swaps. Also
we provide a general partial di erential equation for derivatives that have
an extra dependence on an av- erage of the volatility. We give approximate
solutions of this equation for volatility products written on assets for
which the volatility process uctuates on a timescale that is fast compared
with the lifetime of the contracts.
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