Pricing and hedging variance swaps on a swap rate

A pricing tool for fixed-income volatility products is introduced

market volatility


The variance swaps market is well established in equity derivatives. Volatility swaps and options on variance swaps are among the derivatives with realised variance as the underlying. The variance swap itself is the simplest and best understood derivative paying a realised variance on a stock or an index. The foundations were laid independently by Neuberger (1990) and Dupire (1993), who came up with the model independent variance swap replication in terms of a dynamic

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