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Replicating Portfolio

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A replicating portfolio is an instrument which allows the replication of the future value of a portfolio, respectively the future cash flows of liabilities, under a range of representative scenarios. The replication should be aimed at both the value and the duration of relevant assets in the portfolio. To create a replicating portfolio one has to model a complex liability portfolio, consisting of a limited set of financial instruments (synthetic or tradable). The weights of different assets are then optimized, given a set of constraints and a set of representative scenarios. By using the replicating portfolio as an investment benchmark, it can also contribute towards transparency between investment income and insurance income. Another advantage of a replicating portfolio is that it is prerequisite for a liability driven investment process.