A derivative whose underlying is the correlation between two or more financial variables such as prices, returns, performances, etc. In other words, the payoff of a correlation derivative product depends on the correlation between different stock indices (e.g. basket options), or on the correlation between currency exchange rates and/or between different-currency yield curves (e.g. power reverse dual currency swap), or on possibly discontinuous moves in credit spreads and default correlations (e.g. tranched credit derivatives).
Further examples of correlation derivatives include traffic-light options, diff swaps, quanto swaps, covariance swaps, quotient options and correlation swaps.
Comments