A note on implied correlation for bivariate contracts

Guillaume Coqueret () and Bertrand Tavin ()
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Guillaume Coqueret: emlyon business school
Bertrand Tavin: emlyon business school

Economics Bulletin, 2020, vol. 40, issue 2, 1388-1396

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.

Keywords: Bivariate Contracts; Implied Correlation; Risk Management (search for similar items in EconPapers)
JEL-codes: C6 G1 (search for similar items in EconPapers)
Date: 2020-05-19
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Citations: View citations in EconPapers (1)

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