A note on contracts on quadratic variation.
Given a Black stochastic volatility model for a future F, and a function g, we show that the price of [Formula: see text] can be represented by portfolios of put and call options. This generalizes the classical representation result for the variance swap. Further, in a local volatility model, we give an example based on Dupire's formula which shows how the theorem can be used to design variance related contracts with desirable characteristics.
The Second Swedish National Pension Fund, Gothenburg, Sweden.|Mathematical Sciences, Chalmers University of Technology, Gothenburg, Sweden.
Carl
C
Lindberg