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Replication

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Replication
To replicate the payout of an Option by buying or selling other instruments. Creating a Synthetic option in this way is always possible in a complete market. In the case of dynamic replication this involves dynamically buying or selling the Underlying (or normally, because of cheaper transaction costs, futures) in proportion to an Option’s Delta. In the case of Static replication the Option (usually an exotic Option) is hedged with a basket of standard options whose composition does not change with time – eg, an at-expiry digital Option can be replicated with a Call spread.

See also Static replication, Synthetic asset
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