Correlation swap
A correlation swap is an over-the-counter financial derivative that allows one to speculate on or hedge risks associated with the observed average correlation, of a collection of underlying products, where each product has periodically observable prices, as with a commodity, exchange rate, interest rate, or stock index.
Overview
A correlation swap is an over-the-counter financial derivative that allows one to speculate on or hedge risks associated with the observed average correlation, of a collection of underlying products, where each product has periodically observable prices, as with a commodity, exchange rate, interest rate, or stock index.
Payoff Definition
The fixed leg of a correlation swap pays the notional
N
corr
{\displaystyle N_{\text{corr}}}
times the agreed strike
ρ
strike
{\displaystyle \rho _{\text{strike}}}
, while the floating leg pays the realized correlation
ρ
realized
{\displaystyle \rho _{\text{realized }}}
. The contract value at expiration from the pay-fixed perspective is therefore
N
corr
(
ρ
realized
−
ρ
Pricing and valuation
No industry-standard models yet exist that have stochastic correlation and are arbitrage-free.
See also
Variance swap Rainbow option
Sources
Meissner, Gunter (2014). Correlation risk modeling and management : an applied guide including the Basel III correlation framework-- with interactive models in Excel/VBA. Wiley. p. 11. ISBN 978-1118796900.
Wikipedia contributors · Correlation swap · revision 1372430586 · CC BY-SA 4.0 · Plain text extracted and formatting adapted; tags derived from linked topics.