Static Option Replication: Hedging an Up Out Call
1. Context
In this video from FRM Part 1 Curriculum,a look at how exotic options (specifically, barrier options) can be hedged using static replication. we take Exotics such as barrier options for which dynamic delta hedging might be difficult, static option replication might prove more efficient. In this technique, a replicating portfolio is constructed which replicates the value of the target barrier option along a boundary of stock price and time, and hence, by implication also replicates the value of the option in an interior region. Hedging the option boils down to taking a position in the replicating portfolio that is opposite to the position in the original option. This video is included in the FRM Part 1 preparation course. The details of the reading in which this topic appears are given below:
| Area | Financial Markets and Products |
| Reading | Exotic Options |
| Reference | Chapter 15. Exotic Options In GARP Official Books (FRM Part I, FMP section) (GARP, 2020). |