Replicating portfolio: Difference between revisions
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imported>Doug Williamson (Clarified that the "risk-free" asset is theoretical/hypothetical.) |
imported>Doug Williamson (Layout.) |
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Applying no-arbitrage assumptions, the value of the replicating portfolio at Time 0 is therefore equal to the theoretical value of the option at Time 0. | Applying no-arbitrage assumptions, the value of the replicating portfolio at Time 0 is therefore equal to the theoretical value of the option at Time 0. | ||
== See also == | == See also == | ||
* [[Risk neutral valuation]] | * [[Risk neutral valuation]] | ||
Revision as of 12:33, 22 June 2016
A risk neutral method of valuing options and other financial instruments.
For example a replicating portfolio for an option consists of a combination of the underlying asset and a theoretical risk-free borrowing or deposit, that produces the same payoffs at maturity as the option being valued.
Applying no-arbitrage assumptions, the value of the replicating portfolio at Time 0 is therefore equal to the theoretical value of the option at Time 0.
