Hedging variance options on continuous semimartingales

Peter Carr, Roger Lee

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Pages (from-to)179-207
Number of pages29
JournalFinance and Stochastics
Volume14
Issue number2
DOIs
StatePublished - Apr 2010

Keywords

  • Continuous semimartingale
  • Price bounds
  • Subreplication
  • Superreplication
  • Variance option

ASJC Scopus subject areas

  • Statistics and Probability
  • Finance
  • Statistics, Probability and Uncertainty

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