Consistent pricing and hedging volatility derivatives with two volatility surfaces

Arbeitspapier

Using the joint characteristic function of equity price and state variables, we can price contingent claims on both equity and VIX consistently. Based on linear approximation of jump size, we show that one factor models implies all VIX future contract of different maturities are perfectly correlated in contrast to market observations. In the examples of multi-factor model, we demonstrate how to calculate the optimal hedging ratio for VIX future to hedge VIX option. We derived the unconditional correlation term structure of VIX future implied by the model based on the stationary distribution of state variables. We show multifactor models that are calibrated to the two voaltility surfaces will produce very different hedge ratios for VIX options.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Manchester Business School Working Paper ; No. 635

Classification and Topics

• Classification: Wirtschaft ; Asset Pricing; Trading Volume; Bond Interest Rates ; Contingent Pricing; Futures Pricing; option pricing
• Subject: SPX Volatility Surface ; VIX Volatility Surface ; VIX Futures ; VIX Options ; Hedge Ratio

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Chen, Ke ; Poon, Ser-Huang
• Event: Veröffentlichung
• (who): The University of Manchester, Manchester Business School
• (where): Manchester
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/102378
• Last update: 10.03.2025, 11:47 AM CET