How Can a Market Maker Quantify the Correlation between an Altcoin and BTC for Hedging Purposes?

Market makers quantify correlation using historical price data to calculate a correlation coefficient, such as the Pearson coefficient. They also employ more advanced statistical models like GARCH or copulas to capture non-linear dependencies and time-varying correlations.

This quantification helps determine the necessary adjustment to the delta hedge ratio. A lower, unstable correlation increases the basis risk, which must be compensated for by a wider option spread.