Article by: Mark Broadie, Ashish Jain
Published by: Columbia Business School
Date: 10 Jan 2008
“This paper studies the pricing and hedging of variance swaps and other volatility derivatives, including volatility swaps and variance options, in the Heston stochastic volatility model. Pricing and hedging results are derived using partial differential equation techniques. We formulate an optimization problem to determine the number of options required to best hedge a variance swap. We propose a method to dynamically hedge volatility derivatives using variance swaps and a finite number of European call and put options.”
Full article (PDF): Link