Correlation & volatility

Discussion in 'Forex Trading' started by oconneld, Nov 19, 2007.

  1. oconneld

    oconneld

    Hi,

    I have a question about the relationship between the level of
    correlation and the level of volatility (and thus the price of the cross pair option). I've heard that if actual correlation between the underlying currency pairs increases, the volatility of the physical cross rate will decrease relative to the volatility of the two underlying currencies.

    Is this always true? Or it depends on how the two underlying currency rates are being quoted (i.e. USD currency first or AUD first).

    Does the above statement apply to both situations below?
    - AUD/JPY (USD/JPY and AUD/USD)
    - EUR/JPY (USD/JPY and USD/EUR)

    Cheers,
    Dazza