Static options replication for a portfolio of American options on a stock involves
A) Finding a hedge portfolio to match daily changes
B) Finding a hedge portfolio to match values on a boundary that is certain to be reached
C) Finding a hedge portfolio to match values at one particular time
D) Constructing a hedge taking both gamma and delta into account

Question

Quizplus · Accepted Answer

Static option replication involves finding a hedge portfolio that matches values on some boundary in {S,t} space that is certain to be crossed eventually.Once the boundary is reached the hedge must be unwound and a new hedge created.

Static Options Replication for a Portfolio of American Options on a Stock