A type of market risk that arises from unfavorable changes in the correlation between the price of an asset underlying a quanto option and the volatility of the applicable exchange rate. This correlation affects the price of a quanto option, but it is quite difficult to price the actual effect. Therefore, investors usually use realized correlation plus a “guesstimated” margin, i.e., one based on both estimation and judgment.
Derivatives
Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
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