When valuing a derivatives contract whose payout depends on two assets, the correlation between the random processes followed by those two assets must be taken into account. In most asset classes, there is no liquid instrument to determine that correlation. This makes the exposure to correlation hard to hedge, but straightforward from a modelling point of view since a single number, perhaps calculated from a historic time series of spot returns, can be used.
Repricing the cross smile: an analyti
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