Variance Swap Pricing under an Extension of
Mean-Reverting Gaussian Model

Rui Duan

doi:https://doi.org/10.14445/22315373/IJMTT-V66I9P514

International Journal of Mathematics Trends and Technology

Research Article | Open Access | Download PDF

Volume 66 | Issue 9 | Year 2020 | Article Id. IJMTT-V66I9P514 | DOI : https://doi.org/10.14445/22315373/IJMTT-V66I9P514

Variance Swap Pricing under an Extension of Mean-Reverting Gaussian Model

Rui Duan

Abstract

With a rapid development of financial markets, volatility has always been a core issue in the field of financial research. The essence of a variance swap is a forward contract whose value depends on the future volatility level of the underlying asset. This derivative with volatility as an underlying asset provides direct risk exposure to volatility. Based on the mean-reverting Gaussian volatility model, this paper modifies the differential equation that volatility obeys, and uses the risk-neutral pricing principle to derive the pricing formula of a variance swap under the new model.

Keywords

volatility, Mean-reverting Gaussian model, risk-neutral pricing, variance swap

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Citation :

Rui Duan, "Variance Swap Pricing under an Extension of Mean-Reverting Gaussian Model," International Journal of Mathematics Trends and Technology (IJMTT), vol. 66, no. 9, pp. 117-121, 2020. Crossref, https://doi.org/10.14445/22315373/IJMTT-V66I9P514