Hi, I've got a question regarding the impact of correlation on the price of a basket option.Assume we have a basket option whose payoff is min(S_1+S_2, K), when the correlation between S1 and S2 increases should the price go up or down? The way I do it is to transform the payoff function to -max(-(S1+S2)+K, 0)+K, if correlation increases, assume that the only impact of correlation is on the basket volatility, then basket vol increases which makes max(-(S1+S2)+K, 0), a put option on S1+S2 more valuable, since we are short this put, then the overall payoff decreases. Therefore, the price of this basket option decreases when correlation goes up. Is this correct?Thx

Any inputs?

You asked the exact same question in the student forum just yesterday?

QuoteOriginally posted by: TadYou asked the exact same question in the student forum just yesterday?Unfortunately yes as I tend to grab the attention from more audience