Title: Target volatility option pricing in lognormal fractional SABR model,
Abstract: We examine in this article the pricing of target volatility options in the
lognormal fractional SABR model. A decomposition formula by Ito's calculus
yields a theoretical replicating strategy for the target volatility option,
assuming the accessibilities of all variance swaps and swaptions. The same
formula also suggests an approximation formula for the price of target
volatility option in small time by the technique of freezing the coefficient.
Alternatively, we also derive closed formed expressions for a small volatility
of volatility expansion of the price of target volatility option. Numerical
experiments show accuracy of the approximations in a reasonably wide range of
parameters.