PRICING VARIANCE SWAPS FOR THE DISCRETE BN-S MODEL

We introduce a discrete Barndorff-Nielsen and Shephard (BNS) stochastic volatility model, where the non-Gaussian Ornstein-Uhlenbeck process governs the instantaneous variance of an underlying asset. A closed-form solution for pricing variance swaps in financial markets driven by a BN-S type Levy process is derived. Additionally, we propose a discrete-time framework for arbitrage-free pricing of variance swaps, supported by simulations that provide numerical validation of our results. The model fitting and parameter estimation processes are also discussed in detail.