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Total Posts: 1
Joined: May 2019
Posted: 2019-05-05 04:45

This my first post on this platform. Forgive me if these are not appropriate questions. I am reading the paper titled "A new Approach For Modelling and Pricing Correlation Swaps". I am having trouble proving a few claims made in the paper.

1. On page 3 he claims that $\overline{\sigma}^S(\tau) \ge \sigma^I(\tau)$. All my attempts to prove this have failed. I would appreciate if some one can point me in the right direction.

2. On the same page the note (5) for d(\tau)^2 seems wrong and is not the same as (115). Could some one shed some color on the matter.

I much appreciate the help.


The link to the paper:[Dresdner%20Kleinwort]%20A%20New%20Approach%20For%20Modeling%20and%20Pricing%20Correlation%20Swaps.pdf


Total Posts: 512
Joined: May 2006
Posted: 2019-05-06 16:20
1 is just the standard diversification argument. Take the log of I, square it and take the expectation. Pay attention to the expectation of the cross terms - how big and how small can it get.

2 is the same thing in both expressions. Just make sure you have all the logs and squares correct. It's a bit unfortunate that he uses the letter d for both the differential and for the dispersion function, but there are brackets to tell you which is which.

"There is a SIX am?" -- Arthur
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