An Upper Bound For Volatility Swaps Pricing Under Stochastic Volatility Model With Jump-Diffusion

Wen-Jun Du

doi:https://doi.org/10.14445/22315373/IJMTT-V67I12P508

International Journal of Mathematics Trends and Technology

Research Article | Open Access | Download PDF

Volume 67 | Issue 12 | Year 2021 | Article Id. IJMTT-V67I12P508 | DOI : https://doi.org/10.14445/22315373/IJMTT-V67I12P508

An Upper Bound For Volatility Swaps Pricing Under Stochastic Volatility Model With Jump-Diffusion

Wen-Jun Du

Citation :

Wen-Jun Du, "An Upper Bound For Volatility Swaps Pricing Under Stochastic Volatility Model With Jump-Diffusion," International Journal of Mathematics Trends and Technology (IJMTT), vol. 67, no. 12, pp. 72-77, 2021. Crossref, https://doi.org/10.14445/22315373/IJMTT-V67I12P508

Abstract

During the development of volatility derivatives, volatility swaps become one of the most popular volatility derivatives. Volatility swaps are a kind of volatility derivatives and its essence are forward contracts on annualized realized volatility that provide an easy way for investors to trade future realized volatility against the current implied volatility. This article discusses the valuation of discretely sampled volatility swaps within the frame of Heston’s stochastic volatility model under jump-diffusion model. Due to the independence of a Brownian motion and a compound Poisson process, the realized volatility can be decomposed into two parts. On the jump diffusion model, we introduce the S.G.Kou model with jump sizes double exponentially distributed, and finally work out an upper bound of fair strike price for volatility-average swaps pricing.

Keywords

volatility swaps, stochastic volatility, jump-diffusion, double exponential distribution

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