Replicating portfolio

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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.

See also