Assume I have two assets A and B that are positively correlated most of the time. I'm trading a strategy based on this correlation. Is there a way to protect myself in the event that the correlation tears?
After some googling I found there are OTC correlation swaps for the purpose. However, there seems to be no similar exchange-traded products.
I do not have access to the OTC market and therefore I'm wondering if I can replicate a similar portfolio using vanilla options of A and B, as well as the underlyings, to achieve:
- When correlation is positive & high, I'm paying "premium" for the insurance.
- When correlation is low or even negative, my insurance pays off.