Equity Correlation Swaps: A New Approach For Modelling & Pricing
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Date: 02-26-2007
Start Time:
6:00pm
End Time: 7:30pm
Speaker: Sebastian Bossu, Dresdner Kleinwort
Location: 303 Mudd
ABSTRACT
Correlation swaps appeared in the early 2000's as a means to hedge the parametric risk exposure of exotic desks to changes in correlation. Exotic derivatives indeed frequently involve multiple assets, and their valuation requires a correlation matrix for input. Unlike volatility, whose implied levels have become observable due to the development of listed option markets, implied correlation coefficients are unobservable, which makes the pricing of correlation swaps a perfect example of 'chicken-egg problem.' We will show how a correlation swap on the constituents of an equity index can be viewed as a simple derivative on two types of tradable variance, and derive a closed-form formula for its arbitrage price relying upon dynamic trading of these instruments.
BIO
Sebastien Bossu graduated from HEC Paris and then went on to obtain his Masters in Financial Mathematics at the University of Chicago. After 2 years within JPMorgan's Equity Derivatives Group as an exotics & hybrids structurer, he joined Dresdner Kleinwort in 2005 where he is now running Equity Derivatives Structuring. He is the author of two textbooks, including 'Finance and Derivatives' translated into English by John Wiley & Sons.