# Questions tagged [replication]

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### Risk-neutral probability

I have problem for my financial mathematics class. . At period t=0 I have risk free assets at price of 100 with annual rate of r=5% and two different stocks S1 and S2 whose values are 100. Prices at ...
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### Why does the price of a butterfly spread increase are rate exponential [closed]

I know that stock prices are assumed to be Stochastic processes that follow Geometric brownian motion. The expectation of stock prices at time T given stock price at time 0 is: $e^{-rT}S_0$. However, ...
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### Replicating portfolio with stock, bond and call option

I am trying to interpret: I am having trouble interpreting the replicating strategy: Context: $\phi$ is a generic payoff function, 0 < S < $\infty$, assumed throughout to be twice ...
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### How to Compute the payoff of Var Swaps, which I have replicated

I used Derman(1999) method, to calculate the fixed Kvar for Variance Swaps using actual option price data. The first Pic Shows the outcome. (ignore the 0s). Now the profit and loss of short var swaps ...
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### ETF Replication

I have a question regarding the ETF replication methods. I know there are two main methods, namely physical and synthetic replications, but I would like to understand how an ETF trader can : ...
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### Cash deposit in replicating portfolio for BS equation unnecessary?

The book on Option Valuation Methods that I currently study (Higham 2013) constructs a replicating portfolio $\Pi = A(S,t)S + D(S,t)$ for deriving the BS PDE, where $D$ is a cash deposit. $D$ does not ...
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### Static hedge forward swap using zero coupon swaps

I'm trying to create a static hedge for a forward swap using two spot starting zero coupon swaps (to prove that there is no convexity adjustment needed). Here are the instruments - Paying fixed in ...
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### Replicating an option

When we replicate a portfolio of cash and stock for a call option, shouldn't the replicating portfolio's greeks be equal to options greeks? Is that true? If it is, how is it that a portfolio of cash ...
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### Black-Scholes Equation - Riskless portfolio derivation

The following is a summary of the derivation of the Black-Scholes equation as given on wikipedia (http://en.wikipedia.org/wiki/Black-Scholes_equation#Derivation) - I have a question regarding the ...
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### CMS options, cash-settled/physically-settled swaptions

CMS options are traditionaly replicated using a theoritical "continuous" strip of swaptions (see for instance Hagan's paper "Convexity Conundrums : Pricing CMS Swaps, Caps and Floors"): In the paper,...
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### Price futures option via replication

I ran into some difficulties when trying to price a futures option via replication in a simple one-period binomial model. I am quite aware that this is easy with risk-neutral probabilities and ...
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### Pricing weighted/average stock price claim

In a market consisting of a bank account with a constant interest rate r and a non-dividend paying stock S, consider a T-claim that pays $X = S(T)/S(T_0)$ at time T, where $T_0 < T$. a) ...
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### Replicate a Portfolio with Given Payoff

Looking for a convincing general strategy [not trial and error] to solve these kind of questions: Any help will be super helpful! Thanks a bunch! Replicate a portfolio on an underlying asset $S$ ...
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### Replicating a square derivative with calls and puts

I have a derivative that pays off $S_T^2$ at time $T > 0$ with $S_T$ denoting the price of a non dividend-paying stock at $T$. I came across a question about how one can statically replicate this ...
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### Replicating a portfolio with a certain payoff function

Assume there are two stocks $S_1$ with price $p_1(t)$ and $S_2$ with price $p_2(t)$ where $t$ indicates time. Assume, there is a hypothetical derivative $D$, which is such that, price of $D$ at a time ...
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### Writing option on one's own default

Maybe this is a weird question, but suppose that, for some reason, one would like to write an (implicit) option whose payoff is indexed on the writer's CDS spread. I would like to know what would be a ...
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### Is the replication porfolio for a European Call, self financing for changes in time?

I was reading slide 29 here: http://people.hss.caltech.edu/~jlr/courses/BEM103/Readings/JWCh11.pdf (mirror) Sub-heading: "An interpretation of the Black-Scholes formula" It is saying that the below ...
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### The difference between hedging and replicationg methods of deriving option prices

For deriving, say European, option prices, is there a difference between the replication approach and the hedging approach? More specifically, is there a situation where the hedging approach will not ...