ABSTRACT
This chapter focuses on analytic approximation methods for pricing options on discrete realized variance. We consider the adjustment for the discretization effect via the lognormal approximation. We then discuss the conditional Black-Scholes method and Fourier based discretization adjustment. Next, we present the partially exact and bound approximation for pricing options on discrete realized variance under the Heston model using the conditional normal distribution approximation and conditional gamma distribution approximation. Lastly, we discuss the small time asymptotic approximation of discrete realized variance and continuous realized variance by the gamma distribution under the L´evy models and semimartingale models. The theoretical results are used to derive the correction term added to adjust the impact of discrete sampling on prices of options on realized variance. [121 words]
