Hedging with Derivatives in Incomplete Markets

Charalambos Aliprantis, Donald Brown () and J. Werner

No 1126R, Cowles Foundation Discussion Papers from Cowles Foundation, Yale University

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.

Date: 1997-07
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