Recently in the equity derivatives market there have been some trades on what are known as "Corridor Variance Spreads." The large equity derivative dealers and investment banks have been promoting it quite heavily. Basically, the structure delivers the buyer short variance on one underlying (for example, SPX) and long variance on another underlying (for example, SX5E), however, the variance only accrues if the SX5E stays within a range of spot values. This structure is quite a bit cheaper than going long one SX5E corridor variance swap and short one SPX corridor variance swap individually, with the same corridor range. The correlation somehow cheapens the structure.
I would like to trade it, due to the attractive levels that it offers, but my fund hires somewhat fewer quantitative analysts than say Goldman Sachs and we can't come up with a way to properly price the thing. Does anyone have an analytical pricing formula, an approximation or a way the structure can be replicated with other, less complex, instruments? Thank you very much in advance!