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SUMMARY:Optimal hedging of variance derivatives - Mr John Crosby (UBS and 
 Glasgow University)
DTSTART:20101026T160000Z
DTEND:20101026T170000Z
UID:TALK27208@talks.cam.ac.uk
CONTACT:Rachel Marston
DESCRIPTION:We examine the optimal hedging of variance derivatives\, focus
 sing principally on variance swaps (but\, en route\, also considering skew
 ness swaps)\, when the underlying stock price has discontinuous sample pat
 hs i.e. jumps. In general\, with jumps in the underlying\, the market is i
 ncomplete and perfect hedging is not possible. We derive easily implementa
 ble formulae which give optimal (or nearly optimal) hedges for variance sw
 aps under very general dynamics for the underlying stock which allow for m
 ultiple jump processes and stochastic volatility (or\, more generally\, (p
 ossibly\, multiple) stochastic time-changes). We also consider special cas
 es when perfect hedging of variance swaps is possible even when the underl
 ying stock price has jumps. We illustrate how\, for parameters which are r
 ealistic for equity markets\, our methodology gives significantly better h
 edges than the standard log-contract replication approach which assumes co
 ntinuous sample paths.
LOCATION:Winstanley Lecture Hall\, Trinity College
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