Cracking the correlation conundrum

Cover Story

Controversy seems to be a natural characteristic of the credit derivatives market. Cautionary tales – mostly relating to bespoke single-tranche collateralised debt obligations (CDO) and other correlation products – have peppered the pages of Risk in recent years.

And 2004 is no different. The latest flashpoint relates to how dealers quote implied correlation – a quantity that conveys information about relative value in correlation products, similar to the way implied volatility does for opti