Pricing two dimensional derivatives under stochastic correlation

In this paper, we develop a framework for pricing two dimensional derivatives under stochastic correlation. Closed form approximations for the price of these derivatives are provided based on Taylor's expansions of known price function under constant correlation. Two families of stochastic dynamics for the correlation are considered. The framework is applied in the pricing of spread options and compo options.

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Year of publication:	2011
Authors:	Alvarez, Alexander ; Escobar, Marcos ; Olivares, Pablo
Published in:	International Journal of Financial Markets and Derivatives. - Inderscience Enterprises Ltd, ISSN 1756-7130. - Vol. 2.2011, 4, p. 265-287
Publisher:	Inderscience Enterprises Ltd
Subject:	stochastic correlation \| spread options \| compo options \| closed-form approximation \| 2D derivatives \| derivatives pricing

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Type of publication:	Article
Source:	RePEc - Research Papers in Economics

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