This cautious note aims to point at the potential risks for the financial system caused by various increasingly popular volatility derivatives including variance swaps on futures of equity indices. It investigates the pricing  of variance swaps under the 3/2 volatility model. Carr with Itkin and Sun have discussed the pricing of variance swaps under this type of model. This paper studies a special case of this model and observes an explosion of prices for squared volatility and variance swaps . It argues that such a price explosion may have deeper economic reasons, which should be taken into account when designing volatility derivativesraire portfolio. The growth optimal portfolio is the num\'{e}raire portfolio and used as num\'{e}raire together with the real world probability measure as pricing measure. This pricing concept provides minimal prices for variance swaps even when an equivalent risk neutral probability measure does not exist} .
This paper investigates the pricing and hedging of variance swaps under a 3/2 volatility model. Explicit pricing and hedging formulas of variance swaps are obtained under the benchmark approach, which only requires the existence of the num\'{eraire portfolio. The growth optimal portfolio is the num\'{e}raire portfolio and used as num\'{e}raire together with the real world probability measure as pricing measure. This pricing concept provides minimal prices for variance swaps even when an equivalent risk neutral probability measure does not exist} .
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cautious note aims to point at the potential risks for the financial system caused by various increasingly popular volatility derivatives including variance swaps on futures of equity indices. It
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Carr with Itkin and Sun have discussed the pricing
Explicit pricing and hedging formulas
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under this type of model. This paper studies a special case of this model and observes an explosion of prices for squared volatility and variance swaps . It argues that such a price explosion may have deeper economic reasons, which should be taken into account when designing volatility derivatives
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