Variance Derivatives Pricing and Control Variate Monte Carlo Method

Abstract:

The paper presents an efficient Monte Carlo method on the basis of the Control Variate technique for valuation of the Variance Swap derivatives under the stochastic volatility assumption.The result shows that the method can reduce variance efficiently and improve precision obviously by choosing an efficient control variate testified with the computation results.Finally,a study is also made of the factors affecting the price of the Variance Swap.The method can also be applied to the other valuation of Variance Swaps,such as Corridor Variance Swap,Gamma Variance Swap,Conditional Variance Swap and other products with multifactor models.

Key words:derivatives; variance swap; stochastic volatility; Monte Carlo method; control variate