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Published in:
2016 | OriginalPaper | Chapter
Correlation
Author : Oliver Brockhaus
Published in: Equity Derivatives and Hybrids
Publisher: Palgrave Macmillan UK
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There exists a liquid options market for stock indices and, since the components are often stocks of important companies, there are also options on those stocks. In many financial institutions the responsibility for market data (forward, volatility) is separated between stock and index trading desks. Index exposure will be hedged with indices rather than component stocks. If only Vanilla options are traded this is a valid approach and there is no correlation exposure. Forward discrepancies between index and sum of stocks will typically be small and can be attributed to market inefficiencies.