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Pricing two dimensional derivatives under stochastic correlation

Author

Listed:
  • Alexander Alvarez
  • Marcos Escobar
  • Pablo Olivares

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.

Suggested Citation

  • Alexander Alvarez & Marcos Escobar & Pablo Olivares, 2011. "Pricing two dimensional derivatives under stochastic correlation," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, vol. 2(4), pages 265-287.
    • Handle: RePEc:ids:ijfmkd:v:2:y:2011:i:4:p:265-287
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    Cited by:

    1. Enrique Villamor & Pablo Olivares, 2020. "Pricing Exchange Options under Stochastic Correlation," Papers 2001.03967, arXiv.org.
    2. Marcos Escobar & Pablo Olivares, 2011. "Risk Management Under A Factor Stochastic Volatility Model," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 28(01), pages 65-80.

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