Financial Mathematics, Volatility and Covariance Modelling

4Variance and volatility swaps and futures pricing for stochastic volatility models

Anatoliy Swishchuk and Zijia Wang

1. Variance and volatility swaps for stochastic volatility models

In this chapter, we will focus on the variance and volatility swap pricing under stochastic volatility models and stochastic volatility models with jumps. The continuous variance strike under these models can be found through definition. However, the non-linearity property of square root function requires us to apply some techniques when evaluating the continuous volatility strike. In the following sections, we will use the convexity correction formula to approximate volatility strikes, and the closed-form solutions developed in Broadie and Jain (2008) will also ...