New study reveals simple method to price volatility swaps accurately
In normal stochastic volatility models with zero correlation, the price of a fresh volatility swap equals the at-the-money implied volatility. To replicate a volatility swap, the price throughout its life must be calculated. For seasoned volatility swaps with zero correlation, the exact price and replicating portfolio consist of a strip of vanilla options with simple Gaussian weights. When correlation is non-zero, the error is of order correlation-squared.