A note on implied correlation for bivariate contracts
G Coqueret, B Tavin - Economics Bulletin, 2020 - papers.ssrn.com
Economics Bulletin, 2020•papers.ssrn.com
In this paper we develop a framework in which implied correlation can be rigorously defined
for a class of derivative contracts written on two assets. Within this class, we show that
implied correlation exists and is unique provided that the observed two-asset contract price
is free of arbitrage. We also obtain an analytic result to compute the sensitivity to implied
correlation of a contract's price. We then provide a numerical illustration of these results
applied to spread options.
for a class of derivative contracts written on two assets. Within this class, we show that
implied correlation exists and is unique provided that the observed two-asset contract price
is free of arbitrage. We also obtain an analytic result to compute the sensitivity to implied
correlation of a contract's price. We then provide a numerical illustration of these results
applied to spread options.
Abstract
In this paper we develop a framework in which implied correlation can be rigorously defined for a class of derivative contracts written on two assets. Within this class, we show that implied correlation exists and is unique provided that the observed two-asset contract price is free of arbitrage. We also obtain an analytic result to compute the sensitivity to implied correlation of a contract's price. We then provide a numerical illustration of these results applied to spread options.
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