Pricing Variance Swaps for Stochastic Volatilities with Delay and Jumps

We study the valuation of the variance swaps under stochastic volatility with delayand jumps. In our model, the volatility of the underlying stock price process not onlyincorporates jumps, which are found to be active empirically, but also exhibits past dependence: the behavior of a stock price right after a given time t depends not only onthe situation at t but also on the whole past (history) of the process S(t) up to time t as well.The jump part in our model is finally represented by a general version of compoundPoisson processes. We provide some analytical closed forms for the expectation of therealized variance for the stochastic volatility with delay and jumps. We also present alower bound for delay as a measure of risk. As applications of our analytical solutions,a numerical example using S&P60 Canada Index (1998–2002) is then provided to pricevariance swaps