Which index tracking method requires a swap agreement?

Which index tracking method requires a swap agreement?
A . Full replication
B . Stratified Sampling
C . Synthetic Replication
D . Optimisation

View Answer

Answer: C

Explanation:

Synthetic replication involves tracking an index using derivatives such as swaps. A swap agreement allows the fund to replicate the index performance without holding the actual underlying assets, reducing transaction costs and increasing efficiency.

[Reference: ICWIM, Topic: Index Funds and ETF Strategies., UCITS guidelines on synthetic and physical replication methods.,, ]