Replicating portfolio (original) (raw)
In mathematical finance, a 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 replication, where the portfolio has the same cash flows as the reference asset (and no changes need to be made to maintain this), and dynamic replication, where 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 part
| Property | Value |
|---|---|
| dbo:abstract | In mathematical finance, a 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 replication, where the portfolio has the same cash flows as the reference asset (and no changes need to be made to maintain this), and dynamic replication, where 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 hedge, and 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 pricing, which assumes 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 counterparties, there 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. (en) |
| dbo:wikiPageExternalLink | http://swissre.com/pws/research%20publications/risk%20and%20expertise/technical%20publishing/the%20economics%20of%20insurance.html |
| dbo:wikiPageID | 12723536 (xsd:integer) |
| dbo:wikiPageLength | 5387 (xsd:nonNegativeInteger) |
| dbo:wikiPageRevisionID | 754118520 (xsd:integer) |
| dbo:wikiPageWikiLink | dbr:Put–call_parity dbr:Life_insurance dbc:Actuarial_science dbr:Mathematical_finance dbr:Credit_risk dbr:Portfolio_(finance) dbc:Pricing dbr:Actuary dbr:Discounting dbr:Hedge_(finance) dbc:Mathematical_finance dbr:Black–Scholes_model dbr:Arbitrage-free dbr:Greeks_(finance) dbr:Infinitesimal dbr:Rational_pricing dbr:Net_premium_valuation dbr:Zero-coupon_bond dbr:Self-financing_portfolio dbr:With-profits_policy dbr:Counterparties dbr:Derivatives_pricing |
| dbp:wikiPageUsesTemplate | dbt:Further dbt:Reflist |
| dct:subject | dbc:Actuarial_science dbc:Pricing dbc:Mathematical_finance |
| gold:hypernym | dbr:Portfolio |
| rdf:type | dbo:Company |
| rdfs:comment | In mathematical finance, a 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 replication, where the portfolio has the same cash flows as the reference asset (and no changes need to be made to maintain this), and dynamic replication, where 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 part (en) |
| rdfs:label | Replicating portfolio (en) |
| owl:sameAs | freebase:Replicating portfolio wikidata:Replicating portfolio https://global.dbpedia.org/id/4tXT9 |
| prov:wasDerivedFrom | wikipedia-en:Replicating_portfolio?oldid=754118520&ns=0 |
| foaf:isPrimaryTopicOf | wikipedia-en:Replicating_portfolio |
| is dbo:wikiPageRedirects of | dbr:Replicating_Portfolio dbr:Dynamic_Hedging dbr:Dynamic_hedging dbr:Dynamic_replication_(finance) dbr:Static_hedging dbr:Static_replication |
| is dbo:wikiPageWikiLink of | dbr:Monte_Carlo_methods_in_finance dbr:Variance_swap dbr:Conditional_variance_swap dbr:Barrier_option dbr:Rational_pricing dbr:Self-financing_portfolio dbr:Replicating_Portfolio dbr:Dynamic_Hedging dbr:Dynamic_hedging dbr:Dynamic_replication_(finance) dbr:Static_hedging dbr:Static_replication |
| is foaf:primaryTopic of | wikipedia-en:Replicating_portfolio |