Pricing two dimensional derivatives under stochastic correlation

Alexander Alvarez, Marcos Escobar Anel () and Pablo Olivares

International Journal of Financial Markets and Derivatives, 2011, vol. 2, issue 4, 265-287

Abstract: In this paper, we develop a framework for pricing two dimensional derivatives under stochastic correlation. Closed form approximations for the price of these derivatives are provided based on Taylor's expansions of known price function under constant correlation. Two families of stochastic dynamics for the correlation are considered. The framework is applied in the pricing of spread options and compo options.

Keywords: stochastic correlation; spread options; compo options; closed-form approximation; 2D derivatives; derivatives pricing. (search for similar items in EconPapers)
Date: 2011
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