Explanation:
The realized correlation in a correlation swap is calculated as the arithmetic average of all pairwise realized correlations among the assets. For assets, there are pairs. The realized correlation is:
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Q.24 The buyer of a correlation swap with three assets and a maturity of one year pays a fixed rate of 2.5%. The notional amount of the swap is $1 million. If the realized pairwise correlations of the daily log returns for the three assets are ρ₂,₁ = 0.2, ρ₃,₁ = 0.4 and ρ₃,₂ = 0.3, what is the realized correlation?
A
0.30
B
0.20
C
0.45
D
0.16
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