A novel analytical approach for pricing discretely sampled gamma swaps in the Heston model

Sanae Rujivan

Abstract


The main purpose of this paper is to present a novel analytical approach for pricing discretely sampled gamma swaps, defined in terms of weighted variance swaps of the underlying asset, based on Heston’s two-factor stochastic volatility model. The closed-form formula obtained in this paper is in a much simpler form than those proposed in the literature, which substantially reduces the computational burden and can be implemented efficiently. The solution procedure presented in this paper can be adopted to derive closed-form solutions for pricing various types of weighted variance swaps, such as self-quantoed variance and entropy swaps. Most interestingly, we discuss the validity of the current solutions in the parameter space, and provide market practitioners with some remarks for trading these types of weighted variance swaps.

doi:10.1017/S1446181115000309

Keywords


gamma swaps; weighted variance swaps; Heston model; stochastic volatility



DOI: http://dx.doi.org/10.21914/anziamj.v57i0.9118



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ANZIAM Journal, ISSN 1446-8735, copyright Australian Mathematical Society.