This paper builds on earlier work by Davis and Hobson (Mathematical Finance, 2007) giving model-free---except for a 'frictionless markets' assumption--- necessary and sufficient conditions for absence of arbitrage given a set of current-time put and call options on some underlying asset. Here we suppose that the prices of a set of put options, all maturing at the same time, are given and satisfy the conditions for consistency with absence of arbitrage. We now add a path-dependent option, specifically a weighted variance swap, to the set of traded assets and ask what are the conditions on its time-0 price under which consistency with absence of arbitrage is maintained. In the present work, we work under the extra modelling assumption that the underlying asset price process has continuous paths. In general, we find that there is always a non- trivial lower bound to the range of arbitrage-free prices, but only in the case of a corridor swap do we obtain a finite upper bound. In the case of, say, the vanilla variance swap, a finite upper bound exists when there are additional traded European options which constrain the left wing of the volatility surface in appropriate ways.

In part I of this talk (JC seminar May 2008) we presented motivation and the basic definitions for building homotopy theory into an arbitrary category by introducing the notion of (higher) stacks. In part II we consider a specific example on the category of schemes to illustrate how the machinery works in practice. It will lead us into motivic territory (if we like it or not).