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Answer: Her underlying position is already options and static option replication is not designed to hedge options, as it would add risk to hedge options with options
**D. False.** Static option replication is the use of options to hedge other options. In regard to (A), (B) and (C), each is TRUE as an advantage of static option replication over classic delta-hedging.
Author: Manit Arora
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Question-732.3. Patricia wants to hedge her portfolio of exotic options. The portfolio consists mostly of barrier options. She is comparing a classic delta-hedge to a static options replication; the static option replication entails shorting a portfolio that replicates certain boundary conditions. Each of the following is a good argument in favor of a static option replication, for the purpose of hedging her portfolio, EXCEPT which is WEAKEST argument?
A
The delta of barrier options is discontinuous at the barrier and consequently difficult to delta-hedge
B
The delta-hedged portfolio can still experience losses due to large moves in the underlying asset price
C
Static options replication has a key advantage over delta-hedging in that it does not require frequent rebalancing
D
Her underlying position is already options and static option replication is not designed to hedge options, as it would add risk to hedge options with options
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