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Practical Methods of Financial Engineering and Risk Management by Rupak Chatterjee

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CHAPTER 9

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Hedge Fund Replication

Asset replication, in general, deals with the concept of replicating the returns of one asset with the returns of several other assets. The term does not refer to derivatives replication, in which one uses linear instruments to replicate nonlinear ones, as described in Chapters 1 and 5. The simplest example of asset replication is a mutual fund or exchange-traded fund (ETF) on the S&P 500 index. An ETF is similar to a mutual fund (which can be bought or sold at the end of each trading day for its net asset value) except that it can be traded throughout the trading day. The S&P 500 index owner, Standard and Poor’s ...

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