The importance of market efficiency to derivative pricing is not well understood. The purpose of this paper is to explain this connection using the third fundamental theorem of asset pricing. The third fundamental theorem of asset pricing characterizes the conditions under which an equivalent...

Discretely sampled variance and volatility swaps trade actively in OTC markets. To price these swaps, the continuously sampled approximation is often used to simplify the computations. The purpose of this paper is to study the conditions under which this approximation is valid. Our first set of...