Hedging variance options on continuous semimartingales (Q2430256)

The authors consider pricing and hedging problems for different types of variance options. For spot-starting and forward-starting variance, they find robust subreplication and superreplication strategies, hence, upper and lower price bounds universally valid for all continuous semimartingales. The strategies involve the static holding of European options and dynamical trading of the underlying asset. The authors investigate the pricing and hedging of a variance option. They explore the model-free replicability of general functions of price and variance. From a broader perspective, they continue the ongoing investigation into extracting information about fully path-dependent risks from one-dimensional information about the terminal payoff alone, and into hedging those path-dependent risks using European options.