# Optimal positioning in derivative securities

*P. Carr* and
*D. Madan*

*Quantitative Finance*, 2001, vol. 1, issue 1, 19-37

**Abstract:**
We consider a simple single period economy in which agents invest so as to maximize expected utility of terminal wealth. We assume the existence of three asset classes, namely a riskless asset (the bond), a single risky asset (the stock), and European options of all strikes (derivatives). In this setting, the inability to trade continuously potentially induces investment in all three asset classes. We consider both a partial equilibrium where all asset prices are initially given, and a more general equilibrium where all asset prices are endogenously determined. By restricting investor beliefs and preferences in each case, we solve for the optimal position for each investor in the three asset classes. We find that in partial or general equilibrium, heterogeneity in preferences or beliefs induces investors to hold derivatives individually, even though derivatives are not held in aggregate.

**Date:** 2001

**References:** Add references at CitEc

**Citations:** View citations in EconPapers (77) Track citations by RSS feed

**Downloads:** (external link)

http://www.tandfonline.com/doi/abs/10.1080/713665549 (text/html)

Access to full text is restricted to subscribers.

**Related works:**

This item may be available elsewhere in EconPapers: Search for items with the same title.

**Export reference:** BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text

**Persistent link:** https://EconPapers.repec.org/RePEc:taf:quantf:v:1:y:2001:i:1:p:19-37

**Ordering information:** This journal article can be ordered from

http://www.tandfonline.com/pricing/journal/RQUF20

Access Statistics for this article

Quantitative Finance is currently edited by *Michael Dempster* and *Jim Gatheral*

More articles in Quantitative Finance from Taylor & Francis Journals

Bibliographic data for series maintained by Chris Longhurst ().