Options on Realized Variance in Log-OU Models

Abstract

We study the pricing of options on realized variance in a general class of Log-OU (Ornstein–Ühlenbeck) stochastic volatility models. The class includes several important models proposed in the literature. Having as common feature the log-normal law of instantaneous variance, the application of standard Fourier–Laplace transform methods is not feasible. We derive extensions of Asian pricing methods, to obtain bounds, in particular, a very tight lower bound for options on realized variance.