Abstract
The initial coverage of covariance and correlation in Chap. 6 was designed to help readers successfully navigate the option materials that followed. However, the trading of covariance and correlation warrants a separate topic in itself.
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Notes
- 1.
Unless all of the assets are perfectly positively correlated, which is unlikely.
- 2.
(5000 shares × <Footnote ID=”Fn2”><Para ID=”Par42”>(5000 shares × $0.22) + (5000 × $0.18).</Para></Footnote>.22) + (5000 × <Footnote ID=”Fn2”><Para ID=”Par42”>(5000 shares × $0.22) + (5000 × $0.18).</Para></Footnote>.18).
- 3.
SQRT (0.36) × 26 % = 15.6 %.
- 4.
Crossed vega is the amount of vega traded on both single stock and indexes. So $10 m of crossed vega at a portfolio level means that $10 m of vega on the single stocks is matched with $10 m vega on the index (Risk 2011).
- 5.
The results are not strictly speaking the exactly same as the average has been rounded to two decimal places.
Bibliography
Kolanovic, M. (2010) Why we have a correlation bubble J.P. Morgan research
Risk Magazine (2011) Dispersion tactics Structured products, January
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Schofield, N.C. (2017). Trading Correlation. In: Equity Derivatives. Palgrave Macmillan, London. https://doi.org/10.1057/978-0-230-39107-9_15
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DOI: https://doi.org/10.1057/978-0-230-39107-9_15
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