Using QuantLib for pricing Variance Swaps...

[Scott Robik]

All,

 

I'm interested in using QuantLib for pricing variance swaps. I've setup a simple project following a similar pattern to the packaged examples. Checking the class reference in the documentation, I see three classes that are applicable...

• VarianceSwap - This is a derived Instrument class and I believe is the first thing that must be setup
• MCVarianceSwapEngine and ReplicatingVarianceSwapEngine one or the other of these two pricing engine classes are use in the constructor for the above Instrument object to set the pricing engine.

The deal specific are straight forward i.e. strike, notional, maturity, but some of the other parameters are not so clear...

• For position, I would assume this is something like "long" or "short", but I could not find this type defined in the documentation.
• If I were to value this using ReplicatingVarianceSwapEngine which values the swap based on a portfolio of strike weighted listed options. Where do you enter the mkt data i.e. the portfolio of listed options.
• What process is appropriate for the StochasticProcess passed into the constructor of the Instrument object? My guess is that for equity variance swaps such as the S&P 500 index futures either a GeneralizedBlackScholesProcess or BlackScholesProcess process would work best.

What does the waning "This class does not manage seasoned variance swaps" mean? Is this a short coming in the design of the class and I can address this by modifying the VarianceSwap class? Is there anything else I'm missing in order to price a variance swaps using QuantLib?

Scott L. Robik 
ICAP North America
Harborside Financial Center, 1100 Plaza 5
Jersey City, NJ 07311-4996

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