The replication tag has no wiki summary.
14
votes
3answers
1k views
Why hold options when you can dynamically replicate their payoff?
When holding vanilla options, you can cancel out, theoretically, all risk with dynamic (delta) hedging. Then you earn the "risk free rate of return".
Why would you make such a portfolio when you can ...
13
votes
2answers
576 views
Duality between constant rebalanced portfolio (CRP) and corresponding derivative
One of the greatest achievements of modern option pricing theory is finding corresponding dynamical trading strategies in linear instruments with which you can replicate and by that price derivative ...
8
votes
1answer
191 views
Hedging duality
We consider a financial market over the time interval $[0,T]$ where a risky asset is a semimartingale $S$. By $\mathbb{P}$ we denote the set of all equivalent local martingale measures (ELMM). We ...
6
votes
4answers
552 views
Software for decomposing structured products into plain vanilla products
Nowadays structured products (or packages) with complex payoff diagrams are omnipresent.
Do you know of any software, add-ons, apps, code whatever, that enables you to enter a payoff diagram or a ...
6
votes
1answer
1k views
What is a self-financing and replicating portfolio?
I try to understand the derivation of the Black-Scholes equation based on the "constructing a replicating portfolio".
From mathematical point of view it looks simple. We assume that:
Stock prices ...
6
votes
1answer
564 views
How to run an asset replication regression?
I am doing extensive research on portfolio replication and was hoping to get some help with some problems I am encountering.
I am running a regression between 2 assets that I believe replicate ...
5
votes
1answer
339 views
How to calculate equivalent futures position?
Let's say I have the following two positions:
Buy ATM SPX call, expires in 1 month
Sell ATM SPX put, expires in 1 month
This creates a synthetic futures position. How do I calculate how many ...
5
votes
0answers
100 views
Replicating portfolio and risk-neutral pricing for interest rate options
For equity options, the pricing of options depends on the existence of a replicating portfolio, so you can price the option as the constituents of that replicating portfolio. However, I am not seeing ...
4
votes
2answers
199 views
Which objective function should I choose to minimize tracking error?
Let say I have $n$ assets and their returns over $m$ periods which are represented by a matrix $X \in \mathbb{R}^{m \times n}$, and I have some other asset with return over the same period which is ...
4
votes
1answer
1k views
How to replicate a digital call option
Call Option S=100 K=100 Payoff=1 (option is not available) How can i replicate this (payoff) with calls and puts with strike prices with multiples of 5$
Thanks for help
4
votes
1answer
676 views
What is the replicating portfolio of swaptions for a constant maturity swap (CMS)?
How do you replicate the payoff of a constant maturity swap rate?
That is, if the payoff of a contract pays the 5-year swap rate every year for 10 years, how would you replicate this payoff using ...
3
votes
1answer
113 views
Replicating strategy in the Black-Scholes model
I have a two-asset Black-Scholes model for a financial market:
$dB_t=B_t r dt$
$dS_t=S_t(\mu dt+\sigma dW_t)$
I introduce a European claim $\xi=max(K,S_T)$ with maturity $T$, for some fixed $K$. I ...
2
votes
4answers
229 views
easy one step option replication
I have the following question. Consider that you have a stock currently trading at 100\$. In one month it can jump to 120\$ with probability 99% and go to 80\$ with probability 1%. How much is call ...
1
vote
2answers
277 views
What is the instantaneous P&L of a Variance Swap?
What is the instantaneous P&L of a variance swap.
Is it $(\sigma^{2}_{t}-\sigma^{2}_{implied})dt$?
0
votes
1answer
152 views
Cloning Return Streams
How would one go about cloning/replicating returns of a hedge fund or a strategy. That is given a return series of the object to be clone, is it possible to decompose return and reconstruct another ...
