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Developing a robust model for pricing inter-related volatility-based financial derivative contracts

Grant


Collaborating Organisation


Scheme


  • Linkage Projects

Abstract


  • Highly variable market volatilities, partly due to uncertain supplies of energy, water and fossil fuels, have necessitated new volatility-based hedging derivatives. This project will develop innovative models for pricing volatility-based contracts. Solution algorithms will satisfy the investment industry's practical requirements, such as accounting for the market price of risk and a practical computational speed for traders. We will pursue fundamental research into this fast-evolving area of finance, addressing many unanswered questions such as the important relationships between the price of a variance swap, ATM volatility, volatility skews and the volatility of volatility.

Date/time Interval


  • 2008

Sponsor Award Id


  • LP0882947

Local Award Id


  • 9843

Collaborating Organisation


Scheme


  • Linkage Projects

Abstract


  • Highly variable market volatilities, partly due to uncertain supplies of energy, water and fossil fuels, have necessitated new volatility-based hedging derivatives. This project will develop innovative models for pricing volatility-based contracts. Solution algorithms will satisfy the investment industry's practical requirements, such as accounting for the market price of risk and a practical computational speed for traders. We will pursue fundamental research into this fast-evolving area of finance, addressing many unanswered questions such as the important relationships between the price of a variance swap, ATM volatility, volatility skews and the volatility of volatility.

Date/time Interval


  • 2008

Sponsor Award Id


  • LP0882947

Local Award Id


  • 9843