In this paper we apply Markovian approximation of the fractional Brownian motion (BM), known as the Dobric-Ojeda (DO) process, to the fractional stochastic volatility model where the instantaneous variance is modelled by a lognormal process with drift and fractional diffusion. Since the DO process is a semi-martingale, it can be represented as an Ito diffusion. It turns out that in this framework the process for the spot price $S_t$ is a geometric BM with stochastic instantaneous volatility $sigma_t$, the process for $sigma_t$ is also a geometric BM with stochastic speed of mean reversion and time-dependent colatility of volatility, and the supplementary process $calV_t$ is the Ornstein-Uhlenbeck process with time-dependent coefficients, and is also a function of the Hurst exponent. We also introduce an adjusted DO process which provides a uniformly good approximation of the fractional BM for all Hurst exponents $H in [0,1]$ but requires a complex measure. Finally, the characteristic function (CF) of $log S_t$ in our model can be found in closed form by using asymptotic expansion. Therefore, pricing options and variance swaps (by using a forward CF) can be done via FFT, which is much easier than in rough volatility models.
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