Cross Gamma

[gver]

hi .. I am trying to understand the impact of using incorrect correlation values in pricing .. assuming I have a multi asset option and I delta and gamma hedge it then the PnL shld come purely from covariance PnL .. cld someone help me how to quantify this PnL .. and suppose if I Vega hedge it then I get pure correlation PnL .. how do I quantify how off am I from the real correlation value ..

 

[vertigo]

can you provide me one counter party who will trade this multi asset option with you

 

[gver]

The idea here is not to create a new product .. multi asset options and correlation based products both are traded in the mkt .. I am doing a study to analyse how much conservative quotes for correlation are being used to price these multi asset options .. hence want to see the PnL from the cross gamma ..

 

[financeguy]

The idea here is not to create a new product .. multi asset options and correlation based products both are traded in the mkt .. I am doing a study to analyse how much conservative quotes for correlation are being used to price these multi asset options .. hence want to see the PnL from the cross gamma ..

I think you just treat it like normal single underlying gamma, except the term is cross gamma = d^2 C / dX1 dX2 ... then pnl on the cross gamma is just 1/2 * change in X1 * change in X2 * cross gamma