Pricing of Power Perpetual Futures
March 28, 2023 | Jack Kim, Kristof Lommers, Boris Skidan, Viktor Smits
This study discusses pricing of power perpetual futures where it expands on the existing framework that is based on deterministic volatility. Perpetual futures have been initially suggested by Shiller (1993) to help create derivatives markets in illiquid assets. Whereas they failed to gain traction in traditional asset markets, perpetual futures have been heavily used in crypto trading where they are the main derivatives instruments. Power perpetual futures have been recently introduced as a leveraged version of perpetual futures with a more asymmetric payoff structure. Traditionally people have assumed deterministic volatility in its pricing, and in this paper we introduce power perpetual futures pricing with stochastic volatility.