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Answer: Package of plain-vanilla options has SOME payoffs equal to exotic payoff
Static option replication uses a package of standard, plain-vanilla options to replicate the payoff of an exotic option, typically matching the payoff over a range or at key points rather than guaranteeing every possible payoff in all states. Therefore, the best description is that some payoffs of the plain-vanilla package match the exotic payoff.
Author: Manit Arora
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Question 23.1 Which MOST NEARLY describes static option replication?
A
Package of plain-vanilla options has SOME payoffs equal to exotic payoff
B
ALL payoffs of package of plain-vanilla options matches exotic payoff
C
Package of exotics options matches SOME payoffs equal to plain-vanilla option
D
ALL payoffs of package of exotic options matches plain-vanilla option payoffs
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