On Carr and Lee’s Correlation Immunization Strategy

  title={On Carr and Lee’s Correlation Immunization Strategy},
  author={Jimin Lin and Matthew J. Lorig},
  journal={Applied Mathematical Finance},
  pages={131 - 152}
ABSTRACT In their seminal work Robust Replication of Volatility Derivatives, Carr and Lee show how to robustly price and replicate a variety of claims written on the quadratic variation of a risky asset under the assumption that the asset’s volatility process is independent of the Brownian motion that drives the asset’s price. Additionally, they propose a correlation immunization strategy that minimizes the pricing and hedging error that results when the correlation between the risky asset’s…