Volatility options in rough volatility models

We discuss the pricing and hedging of volatility options in some of the recently introduced rough volatility models. First, we develop efficient Monte Carlo methods and asymptotic approximations for computing option prices and... [ view full abstract ]

We discuss the pricing and hedging of volatility options in some of the recently introduced rough volatility models. First, we develop efficient Monte Carlo methods and asymptotic approximations for computing option prices and hedge ratios in models where log-volatility follows a Gaussian Volterra process. While providing a good fit for European options, these models are unable to reproduce the VIX option smile observed in the market, and are thus not suitable for VIX products. To accommodate VIX options we therefore introduce modulated Volterra processes, and show that these models successfully capture the skew of VIX products.