how to very loosely approximate an option on a spread
Posted: June 23rd, 2008, 11:53 pm
Hello, If I want to *very approximately* replicate a call option on a spread: x1-x2 how may I dynamically or statically do this with liquid calls/puts on the x1 and on the x2. say that the correlation(x1,x2) is always 85% or higher.In other words:1. I want to participate in the upside (could be in a linear fashion like a vanilla call or could be somewhat concave also) 2. want to be protected "somewhat" from the downside... some loss is acceptable3. hedge it minimally with calls and underlying.4. pay up some upfront cost.thanks