Difficulty: Hard
Category: Options & Greeks
Practice quant interview questions from top firms including Jane Street, Citadel, Two Sigma, DE Shaw, and other leading quantitative finance companies.
Topics: variance-swap, implied-volatility, options, quantitative-finance
You are tasked with pricing a variance swap on a liquid equity index. Given a complete implied volatility surface for European options written on this index, how is the fair strike of the variance swap most accurately determined? Assume continuous monitoring of the realized variance over the life of the swap. The fair strike is the strike at which the expected payoff of the variance swap is zero.
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