Synthetic replication uses derivative contracts (swaps) to track an index without directly holding the underlying assets.
Why is Option C Correct?
The fund manager enters into a swap agreement with an investment bank.
The bank provides the return of the target index, while the fund pays a fixed rate or cash return.
This is common for emerging markets or illiquid assets, where direct replication is difficult.
Why Not Other Options?
A (Full replication) → Buys all index components, no swaps used.
B (Stratified sampling) → Buys representative index samples, no swaps.
D (Optimisation) → Uses mathematical models to track an index, no swaps.
???? Reference: CFA Institute (Index Replication Strategies), CISI Wealth & Investment Management.