Pricing and hedging variance swaps on a swap rate

Here, Deimante Rheinlaender solves the pricing and hedging problem for the generic variance swap on a swap rate. The solution is not limited to a specific swap rate model approximation. In order to address the absence of arbitrage constraints and to preserve the model complexity, she develops an alternative approach to swap rate approximations

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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