Price Pseudo-Variance, Pseudo-Covariance, Pseudo-Volatility, and Pseudo-Correlation Swaps - In Analytical Closed-Forms

Cheng, Raymond K. and Lawi, Stéphan and Swishchuck, Anatoliy (2002) Price Pseudo-Variance, Pseudo-Covariance, Pseudo-Volatility, and Pseudo-Correlation Swaps - In Analytical Closed-Forms. Canadian Industrial Problem Solving Workshops > 6th IPSW [Vancouver 27/5/2002 - 31/5/2002].

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Abstract/Summary

In the usual complete market framework, the unique prices of swaps involving so-called pseudo-statistics can be computed as the mathematical expectation of the discounted payoffs under the measure in which the discounted rate process is a martingale. In this report, we present analytic formulas for these expectations for the pseudo-variance and pseudo-volatility swaps, as requested by the problem statement. Also, we use Monte-Carlo simulation to experiment with a stochastic volatility model.

Item Type:	Study Group Report
Study Group:	Canadian Industrial Problem Solving Workshops > 6th IPSW [Vancouver 27/5/2002 - 31/5/2002]
Company Name:	RBC Financial Group
Industrial Sector:	Finance
Additional Contributors:	Badescu, Andrei and Mekki, Hammouda Ben and Gashaw, Asrat Fikre and Hua, Yuanyuan and Molyboga, Marat and Neocleous, Tereza and Petratchenko, Yuri
ID Code:	174
Deposited By:	Michele Taroni
Deposited On:	13 October 2008

Problem Statement

The problem concerns the pricing of swaps involving the so-called pseudo-statistics, namely the pseudo-variance, -covariance, -volatility, and -correlation. These products provide an easy way for investors to gain exposure to the future level of volatility.

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