Consider a two-factor lognormal Libor Market Model. Ignore the drift, so that we can write dL i
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Consider a two-factor lognormal Libor Market Model. Ignore the drift, so that we can write dLit = . . . dt + σiLit (ai1dWt1 + ai2dWt2), where a21i + a21i = 1 and dWt1 dWt2 = 0. Now, let us suppose ai1 = sin θi. Find corr (dLi,dLj). What advantage does this representation have if we wish to calibrate correlations?
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