ERM-616-19: Replicating Portfolios



Reading Source:

Topics Covered in this Reading:

  • Overview
  • Replicating Portfolios
    • Definition of replicating portfolios
    • How the financial industry uses replicating portfolios
  • Link with Risk Management
    • Monitoring of market-risk position/Quantification of market risk
    • Risk dashboard
  • How to Derive the Replicating Portfolio
    • Determination of the replication method
    • Selection of economic scenarios
    • Generation of calibration data
    • Definition of the universe of financial instruments
    • Definition of practical constraints
    • Determination of optimisation of fit method and criteria
  • Limitations of Replicating Portfolios
  • Cluster Modelling: An Alternative to Replicating Portfolios
  • The Holistic Relationship of Replicating Portfolios and Cluster Modelling
  • Examples
    • Single-premium variable annuity
    • Premium-paying endowment with profit sharing