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A note on the pricing and hedging of volatility derivatives

Sam Howison, A. Rafailidis, H.O. Rasmussen


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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