  In their seminal work Carr and Lee (2008) show how to robustly price and
replicate a variety of claims written on the quadratic variation of a risky
asset under the assumption that the asset's volatility process is independent
of the Brownian motion that drives the asset's price. Additionally, they
propose a correlation immunization strategy that minimizes the pricing and
hedging error that results when the correlation between the risky asset's price
and volatility is nonzero. In this paper, we show that the correlation
immunization strategy is the only strategy among the class of strategies
discussed in Carr and Lee (2008) that results in real-valued hedging portfolios
when the correlation between the asset's price and volatility is nonzero.
Additionally, we perform a number of Monte Carlo experiments to test the
effectiveness of Carr and Lee's immunization strategy. Our results indicate
that the correlation immunization method is an effective means of reducing
pricing and hedging errors that result from nonzero correlation.
