Foreign exchange correlation swap: problem solver or troublemaker?

A correlation structure is an important element in pricing products such as correlation swaps


Alvise De Col and Patrick Kuppinger show foreign exchange correlation swap prices exhibit a non-trivial dependency on higher-order parameters, such as the correlations between forex variances. Ignoring them may result in a non-negligible uncertainty in the corresponding quotes. It is demonstrated that stochastic local correlation models are capable of capturing a wide spectrum of that uncertainty

Multi-asset products have become fairly standard for derivatives

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