The client is an investment bank which trades variance swap derivative products with investors. After the recent financial crisis the bank is re-evaluating their variance swap pricing models. They are interested to compare how accurately vanilla diffusion models versus jump-diffusion models forecast the realised variance. As a quant researcher my goal is to implement and compare Black-Scholes model to Merton Jump-Diffusion model in forecasting realised variance. In order to evaluate how accurately each model forecasts the realised variance, a number of graphs were created which demonstrated how well each model performed during calm and turbulent market periods. Finally, a number of statistics were calculated on the variance swap premium to measure the error in the forecasts.
