Probabilistic closed-form formulas for pricing nonlinear payoff variance and volatility derivatives under Schwartz model with time-varying log-return volatility

This paper presents closed-form analytical formulas for pricing volatility and variance derivatives with nonlinear payoffs under discrete-time observations. The analysis is based on a probabilistic approach assuming that the underlying asset price follows the Schwartz one-factor model, where the volatility of log-returns is time-varying. A difficult challenge in this pricing problem is to solve an analytical formula under the assumption of time-varying log-return volatility, resulting in the rea...