A New Approach for Modelling and Pricing Correlation Swaps

[rkadambi]

Hi,



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.



Regards,

Ramesh





The link to the paper:



http://quantlabs.net/academy/download/free_quant_instituitional_books_/[Dresdner%20Kleinwort]%20A%20New%20Approach%20For%20Modeling%20and%20Pricing%20Correlation%20Swaps.pdf[img]/User%20Files/12945/Latex-Equation-13402.gif[/img][img]/User%20Files/12945/Latex-Equation-13403.gif[/img]

[ronin]

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.