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Oct 1

Variance swap hedging under Heston volatility

Posted by abiao at 12:50 | Code » Matlab | Comments(0) | Reads(10035)
Calculate variance swap hedging portfolio under Heston vol model using MC simulation.  The strategy is discussed in Gatheral p.136 and http://www.ederman.com/new/docs/gs-volatility_swaps.pdf.

The strategy works by exploiting the difference between percentage differences and log differences.  A percentage difference is expressed as (S’ – S)/S or S’/S - 1.  A log difference is log(S’) – log(S) or log(S’/S). Fore more detail refer to http://math.nyu.edu/~atm262/files/fall06/casestudies/a7/hestonvarswap.m and the above mentioned paper.

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