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Guillaume Coqueret and Bertrand Tavin
''A note on implied correlation for bivariate contracts''
( 2020, Vol. 40 No.2 )
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
C6 - Mathematical Methods and Programming: General
Manuscript Received : Feb 10 2020 Manuscript Accepted : May 19 2020

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