An easy-to-hedge covariance swap

An easy-to-hedge covariance swap


Since the seminal papers by Neuberger (1990) and Dupire (1993), contracts on volatility and correlation have been of increasing interest. Volatility and correlation products are actively traded on exchanges and over-the-counter. In particular, contracts that pay the realised variance of the log returns of the underlying asset have become a popular product. Part of the reason for their popularity is that they can be perfectly hedged with a static portfolio of European-style call and put options

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