Corridor variance swaps

This article studies a recent variation of a variance swap called a corridor variance swap (CVS). For this swap, returns are not counted in the realised variance calculation if the reference index level is outside some specified corridor. CVSs allow speculators to bet on both the level of the index and its realised variance. The authors, Peter Carr and Keith Lewis, propose a robust hedge of CVSs that requires entry and exit of the corridor be treated asymmetrically in the contract specification. The main conclusion by the authors is that the complications introduced by the asymmetric treatment of entry and exit are outweighed by the improved hedge performance

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