What is a correlation exchange?

correlation swap is a particularly complicated form of financial derivative, which is not directly based on the price of the basic asset. Instead, it is based on the relationship between prices of two or more assets. Due to this complexity, the correlation swap must be organized privately and is not available through conventional financial stock exchanges.

The basic form of a derivative is quite simple. The derivative in itself is an asset, but derives its value from a separate underlying asset. A simple example is the futures contract in which one party agrees to the purchase of a specified amount of shares at a specified price for a specified future date from the other party. This may prove to be a good or bad business depending on the market price of shares on the agreed date of completion: if the market price is higher, the buyer may immediately sell the shares for profit. Since the futures contract is in itself an asset, the purchasing party can sell for the rights to complete the agreement before. This is known as the sale of the position.

Swap derivative is a step further because it is based on two or more basic assets, one on each party in the agreement. This includes two parties agree to exchange income from the relevant assets. For example, in the Swap bonds both parties own bond, but agree to exchange any coupon payments that they receive from your bond. In fact, both parties focus the risk associated with their own asset, such as the risk that the issuer of bonds may not pay the expected payment of the coupon. Such trades can be performed purely as speculation, or can be used to alleviate the risk, tactics known as securing.

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correlation swap is based on a correlation between two assets in the future date, not the price. For example, the first party in the Agreement may predict that the company's share price A may double the price of the B shares for three months and paying Flat is the other party. In return in three months the other sideIt pays a variable amount that depends on the actual correlation. For example, if it turns out that the price of the Company and Company A is three times the price of shares B at this date, the other party may have to pay a larger amount back on the first page.

The correlation swap process is relatively complicated, because the involvement must not only predict how each price changes, but also the comparative changes of the two. This, in turn, makes it difficult to find a fair price for the purchase or selling position in the store. There are currently no patterns that are widely accepted as an accurate and fair valuation in a way that excels in the possibility of arbitration. This is where the trader can use differences in prices between two shops, such as two agreements.