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A note on contracts on quadratic variation

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  • Carl Lindberg

Abstract

Given a Black stochastic volatility model for a future F, and a function g, we show that the price of 1 2 ∫ 0 T g ( t , F ( t ) ) F 2 ( t ) σ 2 ( t ) d t can be represented by portfolios of put and call options. This generalizes the classical representation result for the variance swap. Further, in a local volatility model, we give an example based on Dupire’s formula which shows how the theorem can be used to design variance related contracts with desirable characteristics.

Suggested Citation

  • Carl Lindberg, 2017. "A note on contracts on quadratic variation," PLOS ONE, Public Library of Science, vol. 12(3), pages 1-5, March.
    • Handle: RePEc:plo:pone00:0174133
    DOI: 10.1371/journal.pone.0174133
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    References listed on IDEAS

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