Before revision:  In this paper we "decode" the index option market and extract this correlation information in order to extend the multi-asset version of Dupire's "local volatility" model  . A "local correlation" model (LCM) is introduced for the pricing of multi-asset derivatives  . LCM achieves consistency with both the constituent- and index option markets by construction while preserving the efficiency and easy implementation of Dupire's model.
After revision:  In this paper we "decode" the index option market and extract this correlation information in order to extend the multi-asset version of Dupire's "local volatility" model . A "local correlation" model (LCM) is introduced for the pricing of multi-asset derivatives . We show how consistency with the index volatility data can be achieved by construction . LCM achieves consistency with both the constituent- and index option markets by construction while preserving the efficiency and easy implementation of Dupire's model.