Valuing with Correlation Smile

Practitioner Lecture Series


During happy economic times, a set of assets may appear relatively uncorrelated. During periods of market stress, those same assets often move sharply in the same direction. A multi-asset contract or portfolio that seemed relatively cheap because of the averaging effect suddenly presents much greater risk than anticipated.

This simple point demonstrates the existence of the implied correlation smile, and its importance. However, it is rare for financial institutions to attempt to price in the correlation smile let alone risk manage with it, perhaps because of its perceived difficulty.

In this talk I will show how to mark the implied correlation smile, and provide a unified approach to valuation and risk management. The approach includes (semi)-analytic models for "flow" trades through to full local-stochastic correlation models for more complex or bespoke trades.


Peter Austing (Independent Quant Researcher)

Wednesday, February 12, 2014 - 18:00
to 19:00