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A NOVEL ANALYTICAL APPROACH FOR PRICING DISCRETELY SAMPLED GAMMA SWAPS IN THE HESTON MODEL

Part of: Mathematical finance

Published online by Cambridge University Press:  27 January 2016

SANAE RUJIVAN
SANAE RUJIVAN*
Affiliation:
Division of Mathematics and Statistics, School of Science, Walailak University, Nakhon Si Thammarat 80161, Thailand email rsanae@wu.ac.th
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Abstract

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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.

Keywords

gamma swapsweighted variance swapsHeston modelstochastic volatility

MSC classification

Primary: 91G20: Derivative securities
Type
Research Article
Information
The ANZIAM Journal , Volume 57 , Issue 3 , January 2016 , pp. 244 - 268
Copyright
© 2016 Australian Mathematical Society 

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