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A note on implied correlation for bivariate contracts

Author

Listed:
  • Guillaume Coqueret

    (emlyon business school)

  • Bertrand Tavin

    (emlyon business school)

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.

Suggested Citation

  • Guillaume Coqueret & Bertrand Tavin, 2020. "A note on implied correlation for bivariate contracts," Economics Bulletin, AccessEcon, vol. 40(2), pages 1388-1396.
    • Handle: RePEc:ebl:ecbull:eb-20-00109
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    More about this item

    Keywords

    Bivariate Contracts; Implied Correlation; Risk Management;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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