Abstracts

The main contribution of this paper is to propose a novel analytical approach to price discretely sampled generalized variance swaps of the underlying based on the Heston's (1993) two-factor stochastic volatility model with simultaneous jumps in the asset price and variance processes. The new approach is adopted to produce the closed-form pricing formulae for variance swaps, gamma swaps, corridor variance swaps, and conditional variance swaps. Unlike Zheng and Kwok’s (2013) approach, the pricing formulae obtained in this paper are in much simpler forms than those presented by Zheng and Kwok (2013); the requirement of the parameter functions being twice differentiable in Zheng and Kwok (2013) have now been completely avoided. Furthermore, we show that the proposed methodology can be extended to price various types of generalized variance swaps such as self-quantoed variance swaps, entropy swaps, and proportional variance swaps introduced by Crosby (2013). The solution procedure presented in this paper will thus enable researchers to view this type of problems from a different angle.