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Static replication

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Static replication
Static Replication is a method of Hedging an options Position with a Position in standard options whose composition does not change through time. The method attempts to replicate the payout of the instrument in a more manageable fashion than dynamic Replication, where a Position in the Underlying or futures contracts must be dynamically adjusted if it is to remain effective. Because it uses options to Hedge options, a static Replication Portfolio is a better Hedge for Gamma and Volatility, as well as Delta, than dynamic Replication. Static Replication can be used for Hedging a Position in exotic options with vanilla options, or for replicating a Long-term Option with Short-term options. In practice, however, it is not always possible to Hedge using static Replication. The number of different options and notional amounts required can quickly become unmanageable.

See also Delta-Hedging, Replication, Synthetic asset
Posted by  Privatebanking.com
 
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