A note on contracts on quadratic variation
Journal article, 2017

Given a Black stochastic volatility model for a future F, and a function g, we show that the price of 1/2 integral(T)(0) g(t, F(t))F-2(t) sigma(2)(t)dt 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.

Author

CARL LINDBERG

Chalmers, Mathematical Sciences, Applied Mathematics and Statistics

University of Gothenburg

PLoS ONE

1932-6203 (ISSN)

Vol. 12 3 e0174133

Subject Categories

Mathematics

DOI

10.1371/journal.pone.0174133

More information

Created

10/8/2017