This paper constructs a replicating portfolio for a portfolio rebalancing trade. The main result is that the cash-flows from a rebalancing trade on a single asset portfolio can be statically replicated with a combination of a variance swap and a quadratic return swap. Static replicating...

An option gives the right to buy or sell something in the future at a fixed price. The value of an option comes from price uncertainty: if the future price is high the option to buy at a fixed lower price is valuable. An option to sell at a fixed price hedges the risk that the price will go...