On pricing variance swaps in discretely-sampled with High Volatility model

Authors : Youssef ELKHATİB, Mariam ALSHAMSİ, Jun FAN

Pages : 105-115

Doi:10.53006/rna.908113

View : 23 | Download : 7

Publication Date : 2021-06-30

Article Type : Research Paper

Abstract :In this paper, the valuation of discretely sampled variance swaps is investigated in a financial asset price model with an increase in volatility. More precisely, we consider a stochastic differential equation model with an additional parameter that augments volatility. This is to cover the impact of financial crunches on the prices of a given asset. Under these settings, the calculation of the annualized delivery price of a variance swap is not sure in a closed-form. Following the literature, the delivery price can be written as a finite sum of conditional expectations. We focus our attention on the computations of these expectations and we obtain some interesting results. This leads to a semi- analytical solution to the variance swaps pricing problems. Some illustrations showing the goodness of our model are provided.
Keywords : Stochastic Di erential Equations, discretely sampled variance swaps, high volatility model