In this paper we provide a valuation formula for a variance swap with regime switching. A variance swap is a forward contract on variance, the square of realized volatility of the underlying asset. We assume that the volatility of underlying asset is ...
In this paper we provide a valuation formula for a variance swap with regime switching. A variance swap is a forward contract on variance, the square of realized volatility of the underlying asset. We assume that the volatility of underlying asset is governed by Markov regime-switching process with finite states. We find that the proposed model can provide ease of calculation and be superior to the models currently available.