On pricing variance swaps in discretely-sampled with high volatility model

In this paper, we investigate valuation of discretely-sampled variance swaps in a financial asset price model with increase in volatility. More precisely, we consider a stochastic differential equation model with an additional parameter which augments volatility. This is to cover the impact of financial crunches on pricing a given asset. Under these settings, calculation of annualized delivery price of a variance swap is not sure in a closed form. Following the literature, the delivery price can be written as a finite sum of conditional expectations. We focus on the computation of these expectations and obtain some interesting results. This leads to a semi-analytical solution to the variance swaps pricing problems. We also show the advantage of our model.