Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. Join them; it only takes a minute:

Sign up
Here's how it works:
  1. Anybody can ask a question
  2. Anybody can answer
  3. The best answers are voted up and rise to the top

What are the advantages of buying basket equity swaps derivative compared to single equity swap? Will correlation play a role in basket equity swap?

Thanks in advance

share|improve this question
up vote 1 down vote accepted

Correlation will play an indirect role. Begin by noting that, if correlation is 100%, then your basket swap will behave the same as a swap on a single equity (from a modeling point of view). Thus your risk-management systems and derivatives will care about the correlation. For pure valuation of the swap, there's no role for correlation. Valuation is basically just mark-to-market.

Generally, equity swaps are used to trade in long-short positions that are unavailable or impractical from a regulatory point of view. For example, you might be avoiding dividend taxes or trading foreign securities. If you have a position that you intend to treat as a unit, comprised of a basket of securities, it makes sense to combine the whole thing into one swap to keep transaction costs low.

Note that basket options are considered correlation plays.

share|improve this answer

Your Answer


By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.