What I meant was that you do not need a stochastic model to price max(0, TotalRt - Index retun) even if the dividend is stochastic

<t>hi daveangel,(TotalReturnIndex - PriceIndex)_t starts at 0 and is increasing with time (dividends are positive), so it will always be above 0, so the max has no value. However, it could be above or below the Strike.It is exactly the same idea as for standard call on a stock, you may not need to h...

<t>Hi cfornarola,I think that there is no optionality in your payoff as soon as you suppose that dividends are positive. The only probleme is the cost of replication of the Total Return. For the DJ EuroStoxx Return Index, in the computation of the index, the calculator assumes a level of tax which m...

<r>Hi twofish,Personnaly, I like W. Schachermayer's review paper :<URL url="http://www.fam.tuwien.ac.at/~wschach/pubs/preprnts/prpr0119.pdf.He"><LINK_TEXT text="http://www.fam.tuwien.ac.at/~wschach/pu ... 119.pdf.He">http://www.fam.tuwien.ac.at/~wschach/pubs/preprnts/prpr0119.pdf.He</LINK_TEXT></URL...

figaro,I agree on the dynamic hedge. You use OTM and ITM vanillas because you have a stoch vol model? The reasons why you don't use varswap modeling (Consistent variance curve models by H. Buehler, for example) comes from the ln(S_T/S_0)^2 term in the payoff of the volswap? Am I right?

<t>Hi,I'm trying to get market values of volatility swaps using P. Carr et R. Lee's paper. My problem is about the definition of the payoff. If we start to price a variance swap, for me, it doesn't matter to define the realized variance as the sum of the squared log returns or the sum of squared log...