Most existing variance derivatives pricing models contribute to equity assets, though various typesof fixed-income variance derivative emerges in financial market. This paper presents an analyticapproach for pricing discretely sampled fixed-income variance swaps under an affine jump-diffusionmodel with three factors: stochastic mean, stochastic volatility, and jumps. By extending thetransform analysis of Duffie et al. (2000), we derive closed-form pricing formulas for these swaps,including two zero-coupon bond variance swaps, LIBOR-rate variance swap, and bond yieldvariance swap. Our pricing framework also can be applied to value other interest-rate sensitiveproducts.
|Effective start/end date||1/08/17 → 31/07/18|
- fixed-income variance swaps
- three-factor model
- closed-form solution
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