Question: Sample Application F in the DerivaGem Application Builder Software considers the static options replication example in Section 26.17. It shows the way a hedge can

Sample Application F in the DerivaGem Application Builder Software considers the static options replication example in Section 26.17. It shows the way a hedge can be constructed using four options (as in Section 26.17) and two ways a hedge can be constructed using 16 options.

(a) Explain the difference between the two ways a hedge can be constructed using 16 options.

(b) Explain intuitively why the second method works better.

(d) Check how well the 16-option portfolios match the delta, gamma, and vega of the barrier option.

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a Both approaches use a one call option with a strike price of 50 and a maturity of 075 In the first ... View full answer

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