Hedging variance options on continuous semimartingales

We find robust model-free hedges and price bounds for options on the realized variance of [the returns on] an underlying price process. Assuming only that the underlying process is a positive continuous semimartingale, we superreplicate and subreplicate variance options and forward-starting variance options, by dynamically trading the underlying asset, and statically holding European options. We thereby derive upper and lower bounds on values of variance options, in terms of Europeans.

• Type: Journal
• Year: 2010
• Where: FS
• Authors: Peter Carr, Roger Lee
• Keywords: FS 2010, Robust Model-free Hedges, Underlying Price Process, Variance Options