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Variance Swap Replication: Discrete or Continuous?

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Numerical Analysis, TU Delft, 2628 Delft, The Netherlands
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Financial Engineering, Calypso Technology, 75002 Paris, France
J. Risk Financial Manag. 2018, 11(1), 11; https://doi.org/10.3390/jrfm11010011
Received: 14 December 2017 / Revised: 1 February 2018 / Accepted: 5 February 2018 / Published: 12 February 2018
(This article belongs to the Section Mathematical Finance)
The popular replication formula to price variance swaps assumes continuity of traded option strikes. In practice, however, there is only a discrete set of option strikes traded on the market. We present here different discrete replication strategies and explain why the continuous replication price is more relevant. View Full-Text
Keywords: variance swap; volatility; derivatives; quantitative finance variance swap; volatility; derivatives; quantitative finance
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Le Floc’h, F. Variance Swap Replication: Discrete or Continuous? J. Risk Financial Manag. 2018, 11, 11.

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