Title

Hedging with Derivatives in Incomplete Markets

Document Type

Discussion Paper

Publication Date

5-1-1996

CFDP Number

1126R

CFDP Revision Date

1997-06-01

CFDP Pages

13

Abstract

We present necessary and sufficient conditions on the asset span of incomplete derivative markets for insuring marketed portfolios. If the asset span is finite dimensional there exists a polynomial-time algorithm for deciding if every marketed portfolio is insurable, moreover this algorithm computes the minimum cost insurance portfolio. In addition, we extend the Cox-Leland characterization of optimal portfolio insurance in complete derivative markets to asset spans of incomplete derivative markets where every marketed portfolio is insurable.

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