ABSTRACT
This chapter is devoted to variance swaps (VS) and their connection to delta-hedged log contracts – it is a prerequisite for the chapters that follow.
We show how a VS can be synthesized using European payos, characterize the impact of large returns on its replication and assess the relevance of pricing a VS in a jump-diusion model. Finally we analyze the impact of cash-amount dividends on the VS replication, as well as the eect of interest-rate volatility.
