Hedging variance options on continuous semimartingales |
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Authors: | Peter Carr Roger Lee |
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Institution: | 1. Bloomberg LP, 731 Lexington Ave, New York, NY, 10022, USA 2. Department of Mathematics, University of Chicago, Chicago, IL, 60637, USA
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Abstract: | We find robust model-free hedges and price bounds for options on the realized variance of the returns on] an underlying price
process. Assuming only that the underlying process is a positive continuous semimartingale, we superreplicate and subreplicate
variance options and forward-starting variance options, by dynamically trading the underlying asset and statically holding
European options. We thereby derive upper and lower bounds on values of variance options, in terms of Europeans. |
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