Duplicating Contingent Claims by the Lagrange Method

The problem of investing y(0) dollars at time 0 to duplicate a contigent claim is formulated as a dynamic optimization problem and solved by the Langrange method. If the function defining dy(t) is concave in y(t), owing to costs of trading in incomplete markets, there is an economy of scale in producing many claims simultaneously, thus explaining the profitability of institutions in providing such financial services.

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Year of publication:	2003-06-10
Authors:	Chow, Gregory C.
Institutions:	EconWPA
Subject:	Finance

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Extent:	application/pdf
Series:	Finance.
Type of publication:	Book / Working Paper
Notes:	Published in Pacific Economic Review, 4:3 (1999)
Classification:	G - Financial Economics
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005561627