Variance Swap Replication: Discrete or Continuous?

Abstract

Abstract:The popular replication formula to price variance swaps assumes continuity of traded option strikes. In practice, however, there is only a discrete set of option strikes traded on the market. We present here different discrete replication strategies and explain why the continuous replication price is more relevant.

Editorial Statement for Mathematical Finance

“…In practice, however, there is only a discrete set of option strikes traded on the market. Le Floc'h (2018) presents different discrete replication strategies and explains why the continuous replication price is more relevant. Ghitany et al (2018) propose an alternative generalization of the Pareto distribution, study its properties, and apply their proposed model to analyze earthquake insurance data.…”