The worst-of term calculator
Why a second underlying nearly doubles the breach probability.
Interactive: the worst-of termHard
A "worst-of two" pays on whichever underlying does worse. This is not diversification — it is selling correlation risk, and it is the least visible term in retail structured products. Move the correlation slider input and watch the breach probability move.
- One asset alone breaches
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- Worst of the two breaches
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- The difference
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- If correlation were 1
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- If they were independent
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- Reading
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At correlation 1 the worst-of is identical to a single asset — there is only one bet. At correlation 0 the breach probability is far higher, because either one failing is enough. A term sheet that adds a third or fourth underlying "for diversification" is doing the opposite, and the compensation for it is rarely visible in the coupon. Computed from the bivariate normal distribution by numerical integration, with no simulation.
The idea behind it
This calculator belongs to Volatility, where the mechanism it computes is explained step by step, with the formula, what each input means and where the simple model stops being right. Everything is computed in your browser; nothing you type is sent anywhere.
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