Sample Application F in the DerivaGem Application Builder Software considers the static

Chapter 26, Problem 26.28

(choose chapter or problem)

Sample Application F in the DerivaGem Application Builder Software considers the static options replication example in Section 26.17. It shows the way a hedge can be constructed using four options (as in Section 26.17) and two ways a hedge can be constructed using 16 options. (a) Explain the difference between the two ways a hedge can be constructed using 16 options. Explain intuitively why the second method works better. (b) Improve on the four-option hedge by changing Tmat for the third and fourth options. (c) Check how well the 16-option portfolios match the delta, gamma, and vega of the barrier option.

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