A
AcadiFi
TP
tcp_practice2026-05-21
cfaLevel IDerivativesReplication

How does replication help price a derivative?

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AcadiFi Certified Professional

Replication prices a derivative by matching its future payoff with a portfolio whose current cost can be observed or computed.

Suppose a derivative and a portfolio have the same payoff in every relevant future state. If markets are arbitrage-free, those two positions should have the same value today after financing is handled correctly. If the derivative trades above the replication cost, it looks expensive. If it trades below the replication cost, it looks cheap.

The replication portfolio is not merely a shortcut. It is the reason the fair price exists.

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