# Questions tagged [replication]

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### Nearly replicate a basket with a few of its constituents

Motivation I have a basket with 30 constituents each with a weight which I want to nearly replicate with less than 30 trades for reducing trading costs. Better definition Better replication equals ...
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### Super-replicating and sub-replicating portfolios and hedging

For recall, assuming that European options are traded at discrete strikes: the portfolio of vanilla options that minimally super-replicates an option $O$ is the portfolio of options that costs least ...
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### Discontinuous derivative payoff approximation

Consider a derivative of digital type which pays this kind of payoff at time $T$: \begin{align*} g(S_T,k) &= \begin{cases} P_0,~S_T>k \\ S_T, ~S_T\leq k \end{cases} \end{...
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### Construct a portfolio of European call options with a certain payoff function

My question is similar to Replicate a Portfolio with Given Payoff but I am not quite sure how to apply this to my problem. A portfolio of European call options on an asset $S_T$ has a payoff ...
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### Pricing an exotic with barrier at discrete times

How would you price the following option on underlying $S$ without dividends? Time to maturity of option $\tau = 12$ months Option has a strike $K > 0$ and constant barrier $B > 0$. $t_0$ is ...
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### Profit and Loss on delta-hedged portfolio

The overnight profit formula from a textbook (possibly Derivative Markets by McDonald) is the following: $$\Delta _{t}(S_{t+h}-S_{t})-(V_{t+h}-V_{t})-(e^{rh}-1)(\Delta_{t}S_{t}-V_{t}),$$ where Delta ...
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### What Positions on an Underlier CANNOT be Hedged with Vanillas?

Say I have infinite precision of strikes $K$ (continuous world $dk$) and expirations $T$ (continuous $dT$) all with liquidity (so no practical limitations). What positions in an underlying can't be ...
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### Collateral replication argument

I'm trying to follow the replication argument in the first page of the following paper http://www.math.columbia.edu/~fts/Collateralized%20trade%20pricing%20made%20simple%20v1a.pdf One can however ...
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### delta-hedging is failing

and thank you for answering me ! While I was recently testing a delta-hedging on a few products, I got a P&L result of 20% for some of them. First, I thought that the implementation was ...
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### How bad off are we when we use the “regular delta replication” strategy in an FX market on a Quanto?

See this question for context: https://quant.stackexchange.com/questions/32725/dynamic-hedge-of-quanto-options#= In there, I expressed interest in how well the usual strategy of replicating an ...
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### Why does this delta hedge work, and what to do in more general circumstances?

In the simple Black-Scholes model, we can replicate an option by investing its $\Delta$ in the underlying, and keeping that portfolio self-financing via the bank account. I have two questions. I don'...
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### How to replicate a correlation swap using only vanilla options and underlying

Assume I have two assets A and B that are positively correlated most of the time. I'm trading a strategy based on this correlation. Is there a way to protect myself in the event that the correlation ...
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I am looking for any reference where the following problem was addressed: given the list of trades of a trader teach an AI to replicate that trader's strategy. There are several well-known results ...
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### Variance swap replication and variance vega

Noob here. I've been trying to gain a better understanding of variance swaps and what better way than to replicate it with a portfolio of better understood instruments. I have read the GS 1999 ...
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### How to properly assess the costs of replicating an index via futures contracts?

I would like to validate this sentence, coming from a WSJ article: The cost of holding a Eurostoxx 50 future, for example, has climbed from an average of 0.07% of the contract value since 1998, ...
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### replicating strategy three step binomial

I am having some trouble setting up a replicating strategy for a call option with a three step binomial model (discrete). I have no trouble doing this in a two step binomial model by backward ...
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### 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 ...
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### Good book about replicating portfolios

I want to know if anybody can suggest me a good textbook which explains in detail and in an understandable way how to create replicating portfolios of financial instruments like options "cash or ...