Pricing and Correlation Risk

Is the holder of a compo option long or short correlation? 

 

To answer this question, it is good to model the change in stock price for a small dt in the currency of the compo: 

Compo 1        where   Compo 2

 

It shows that the holder of a compo option is long correlation. 

 

The main theme is the difference in IV compared to a regular option. 

 

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