Table 4: Exact vs. Given the current state, there are two possible states next period. The number of steps on the event tree is N, T refers the number of time periods and P is the number of steps per period. This model is further developed by Davis et al. Clarke, Harindra de Silva, CFA, and Steven Thorley, CFA Published by the Research Foundation of CFA Institute Summary prepared by Roger G. Department of Economics, City University, London.




In mathematical financea replicating portfolio for a given asset or series of cash flows is a portfolio of assets with the same properties especially cash flows. This is meant in two distinct senses: static replicationwhere the portfolio has the same cash flows as the reference asset and no changes need to be made to maintain thisand dynamic replicationwhere the portfolio does not have the same cash flows, but has the same " Greeks " as the reference asset, meaning that for small properly, infinitesimal changes to underlying market parameters, the price of the asset and the price of the portfolio change in the same way.

Dynamic replication requires continual adjustment, as the asset and portfolio are only assumed to behave similarly at a single point mathematically, their partial derivatives are equal at a single point. Given an asset or liability, an offsetting replicating portfolio a " hedge " is called a static hedge or dynamic hedgeand constructing such a portfolio by selling or purchasing is called static hedging or dynamic hedging.

The notion of a replicating portfolio is fundamental to rational pricingwhich forex low spread trading platform very zezy that market prices are arbitrage-free — concretely, arbitrage opportunities are exploited by constructing a replicating portfolio.

In practice, replicating portfolios are seldom, if ever, exact replications. Most significantly, unless they are claims against the same counterpartiesthere is credit risk. Further, dynamic replication is invariably imperfect, since actual price movements are not infinitesimal — they may in fact be large — and transaction costs to change the hedge are not zero. Dynamic replication is fundamental to the Black—Scholes model of derivatives pricingwhich assumes that derivatives can be replicated by portfolios of other securities, and thus their prices determined.

See explication under Rational pricing The replicating portfolio. In limited cases static replication is sufficient, notably in put—call parity. An important technical detail is how cash is treated. Most often one considers a self-financing portfoliowhere any required cash such as for premium payments is borrowed, and excess cash is loaned. In the valuation of a life insurance company, the actuary considers a series of future uncertain cashflows including incoming premiums and outgoing claims, for example and attempts to put a value on these cashflows.

There are many ways of calculating such a value such as a net premium valuationbut these approaches are often arbitrary in dynamic replication put option in chinese the interest rate chosen for discounting is itself rather arbitrarily chosen. One possible approach, and one that is gaining increasing attention, is the use of replicating portfolios or hedge portfolios.

The theory is that we can choose a portfolio of assets fixed interest bonds, zero coupon bonds, index-linked bonds, etc. Such a construction, which requires only fixed-income securities, is even possible for participating contracts at least when bonuses are based on the performance of the backing assets. The proof relies on a fixed point argument. Replicating portfolios can be set up to replicate such options and guarantees.

It may be easier to value the replicating portfolio than to value the underlying feature options and guarantees. For example, bonds and equities dynamic replication put option in chinese be used to replicate a call option. For additional information on economic valuations and replicating portfolios can be found here: The Economics of Insurance. From Wikipedia, the free encyclopedia. Contents Further information: Black—Scholes. Journal of Applied Analysis. Not logged in Talk Contributions Create account Log in.

Main page Contents Featured content Current events Random article Donate to Wikipedia Wikipedia store. Help About Wikipedia Community portal Recent changes Contact page. What links here Related changes Upload file Special pages Permanent link Page information Wikidata item Cite this page. Create a book Download as PDF Printable version. This page was last modified on 10 Decemberat Text is available under the Creative Commons Attribution-ShareAlike License. By using this site, you agree to the Terms of Use and Privacy Policy.




3 Short Put Adjustments


Dynamic Replication of Option Strategies 01/18/16 Mo Chaudhury Synthetic Position and Arbitrage Contd EUROPEAN OPTION PUT CALL PARITY C P = S 0 exp. when the instrument used in the dynamic hedging of the option is a Hedging Stock Options Using Futures Contracts on European put option. Replication. Download " Optimal Replication of Futures and Options on Chinese Market Abstract This paper develops a future and option pricing model and applies it to the.