Use

A correlation option comprises a basket option, plus a plain vanilla option for each underlying of the basket option. The long position of a correlation option contains a short position of a basket option and long positions of the plain vanilla options with an underlying. Alternatively, a correlation option can comprise an average spot basket option and its associated average spot options.

The nominal volumes of the options in the basket are the same as the nominal volumes of the individual options (in other words the plain vanilla options and the average spot options). The strike of the basket option is the same as the total of the strikes of the individual options. The other option parameters, such as the exercise type or the exercise date, are the same for all components of the correlation option.

Integration

You create correlation options as generic transactions. For more information, see Creating Correlation Options .

Prerequisites

As for other transactions, the same valuation rule has to be used for all the components of a correlation option.

Features

The system calculates the value V _{correlation option} (t) for a correlation option as the difference between the value of the portfolio of individual options and the value of the basket option:

where t is the horizon date and N is the number of options in the basket. This formula applies for both call and put options, and for correlation options that contain average spot options. For more information about pricing basket options, see Basket Options and Average Spot Options .