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Vietnam Journal of Mathematics

, Volume 45, Issue 1–2, pp 255–264 | Cite as

A Closed-Form Formula for Pricing Variance Swaps on Commodities

  • Anurak Weraprasertsakun
  • Sanae RujivanEmail author
Article
  • 161 Downloads

Abstract

This paper presents an analytical approach for pricing discretely sampled variance swaps, when the underlying asset is set to be a commodity. We consider a variance swap with its realized variance, defined in terms of squared log returns of the underlying commodity, based on Schwartz’s one-factor model. Most interestingly, we show that our closed-form solution produces financially meaningful values of the fair delivery price in the parameter space. The current analytical approach would be beneficial for market practitioners who need an analytical solution for pricing variance swaps, and is based on a commodity underlying asset, which substantially reduces the computational burden by using Monte Carlo methods, and can be implemented efficiently.

Keywords

Variance swaps Discrete sampling Schwartz’s model Commodity prices 

Mathematics Subject Classification (2010)

91G20 

Notes

Acknowledgments

This work was supported by Walailak University Fund. The authors gratefully acknowledge the Walailak University and the grant WU58202. We are also indebted to two anonymous referees for suggestions that substantially improved the paper.

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Copyright information

© Vietnam Academy of Science and Technology (VAST) and Springer Science+Business Media Singapore 2016

Authors and Affiliations

  1. 1.School of ScienceWalailak UniversityNakhon Si ThammaratThailand
  2. 2.Division of Mathematics, School of ScienceWalailak UniversityNakhon Si ThammaratThailand

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