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Hard · Stochastic Calculus · Quant Trader interview question · variance-swap, static-replication, options, log-contract, breeden-litzenberger
You are tasked with statically replicating a log contract with payoff $ \ln(S_T / S_0) $ using European options with expiry $T$. Which of the following portfolios of European puts and calls provides the most accurate replication? Assume continuous strikes are available and $ S_0 $ is known. Remember that static replication aims to create a portfolio that mimics the target payoff without requiring dynamic adjustments.