Pricing variance swaps with stochastic volatility

Following the pricing approach proposed by Zhu & Lian [19], we present an exact solution for pricing variance swaps with the realized variance in the payoff function being a logarithmic return of the underlying asset at some pre-specified discrete sampling points. Our newly-found pricing formula is based on the Heston's [8] two-factor stochastic volatility model. The discovery of this exact and closed-form solution has significantly improved the computational efficiency involved in computing the value of variance swaps with discrete sampling points.