Variance Swap Implementation
Posted by
animesh on
Aug 30, 2010; 9:41am
URL: http://quantlib.414.s1.nabble.com/Variance-Swap-Implementation-tp13389.html
I have been trying to price Variance Swap using Monte carlo
simulation. After trying various codes including the one in
test-suite I wasn't able to get the correct price. There is a huge
different in fair price. For example fair strike of variance swap
for 20% volatility generally is implied vol of 90 Strike put.
Roughly this is around 30% - 33%.
Quantlib gives out 20%.
Initially I thought I was doing something wrong in my code. I
then checked the various classes "McSimulation.hpp,
mcvarianceswapengine.hpp". I traced down the "Strategy" pattern
being used and the code
McSimulation<SingleVariate,RNG,S>::calculate(requiredTolerance_,
requiredSamples_,
maxSamples_);
Again this uses the MonteCarlo model and the path generator to
generate the random walk. Problem is it's using the variance and
mean of the random walk!!!
For variance swap
1. Generate the random walk,
2. Calculate Log returns (Missing Step)
3. Calculate variance of Log returns
4. Annualize it (x 252), take square root. = Fair strike of
variance swap.
I think the Variance swap replication implementation is correct,
but generally I don't trust it coz of mathematical anomaly I
described in my blog.
(Just read the last paragraph)
http://quantanalysis.wordpress.com/2010/08/21/variance-swaps-%E2%80%93-simple-mistakes/
--
Regards,
Animesh Saxena
(http://quantanalysis.wordpress.com)
Ph: (+91)9920098221
------------------------------------------------------------------------------
Sell apps to millions through the Intel(R) Atom(Tm) Developer Program
Be part of this innovative community and reach millions of netbook users
worldwide. Take advantage of special opportunities to increase revenue and
speed time-to-market. Join now, and jumpstart your future.
http://p.sf.net/sfu/intel-atom-d2d_______________________________________________
QuantLib-dev mailing list
[hidden email]
https://lists.sourceforge.net/lists/listinfo/quantlib-dev