This module is developed from the paper titled ‘OPTIMAL HEDGING OF VARIANCE DERIVATIVES’
presented in Quant Europ on 2010. The respected
author of this publication is JOHN CROSBY. This paper examines the optimal hedging
of derivatives that is on variance swaps and skewness swaps when the underlying
stock price has discontinuous sample paths i.e. jumps.
Our implementation incorporates K levy processes, which is deterministic, non-decreasing,
and continuous time-change process. This time change process is fixed to be integration
over a special type of activity rate process called Heston (1993) square root process.
The method in this paper uses three assumptions- 1) common time-change process assumption,
2) independent time change process assumption and 3) deterministic time change process
assumption. Our aim is to give output of Position of log-forward-contracts (LFC),
and units of forward contracts for short position. The Hedging strategies are-