Replicating portfolio


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Replicating portfolio

A portfolio constructed to match an index or benchmark.

Replicating Portfolio

A portfolio that attempts to match, as closely as possible, some benchmark or index. See also: Index fund, Exchange-traded fund.
References in periodicals archive ?
This dynamic hedging strategy specifies the composition of the underlying replicating portfolio.
Let V(t, n) denote the time t value process of the replicating portfolio for a contingent claim maturing at n, that is, V(t, n) = a (t, n)S(t) + b(t, n).
The model parameters are estimated at the current time from market prices of traded assets and a replicating portfolio is established for a particular exotic option based on the model under consideration.
Since long-term foreign currency options are not actively traded and there are no data available, they look at how much the value of the replicating portfolio deviates from the model price.
By constructing a replicating portfolio, the appraiser is able to back out the option value, or price.
Thus, the replicating portfolio should consist of one share of stock for each four options sold.
24, and the desire to capture more of this "free money" will imply that the forces of supply and demand will equate the value of the replicating portfolio and the option.
To hedge an option, or any risky security, one needs to construct a replicating portfolio of other securities, one in which the payoffs of the portfolio exactly match the payoffs of the option.
For a forward contract, the replicating portfolio involves a buy and hold strategy.
These replicating portfolios are not without risk as they aim to forecast future hedge fund behavior with past returns.
patent for its stochastic optimization algorithm and process for replicating portfolios of securities.