A Note on Implied Correlation for Bivariate Contracts

Economics Bulletin, 2020, Vol. 40, Issue 2, pp. 1388-1396

10 Pages Posted: 15 Mar 2021

Date Written: May 19, 2020

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

JEL Classification: G13, C52

Suggested Citation

Coqueret, Guillaume and Tavin, Bertrand, A Note on Implied Correlation for Bivariate Contracts (May 19, 2020). Economics Bulletin, 2020, Vol. 40, Issue 2, pp. 1388-1396, Available at SSRN: https://ssrn.com/abstract=3802537

Guillaume Coqueret

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

Bertrand Tavin (Contact Author)

emlyon business school ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
25
Abstract Views
156
PlumX Metrics