No-Arbitrage Bounds on Contingent Claims Prices with Convex Constraints on the Dollar Investments of the Hedge Portfolio

Claus Munk

Finance from University Library of Munich, Germany

Abstract: With constrained portfolios, contingent claims do not generally have a unique price, for which there are no arbitrage opportunities. We generalize earlier results of El Karoui and Quenez (1995) and Cvitanic and Karatzas (1993) by showing that there is an interval of no-arbitrage prices, when there are convex constraints on the dollar investments in the assets in the hedge portfolio. We also show that the bounds of the no-arbitrage interval can be found by solving two stochastic control problems, and we demonstrate how to solve these problems numerically.

Keywords: Contingent claims pricing; constrained dollar investments; no- arbitrage bounds; numerical solution (search for similar items in EconPapers)
JEL-codes: C61 G13 (search for similar items in EconPapers)
Pages: 30 pages
Date: 1997-12-17
Note: Type of Document - LaTeX 2e; to print on PostScript; pages: 30 ; figures: included
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