Optimal replication of contingent claims under portfolio constraints

Mark Broadie, Jakša Cvitanić, H. Mete Soner

Research output: Contribution to journalArticle

56 Scopus citations

Abstract

We determine the minimum cost of super-replicating a nonnegative contingent claim when there are convex constraints on portfolio weights. We show that the optimal cost with constraints is equal to the price of a related claim without constraints. The related claim is a dominating claim, that is, a claim whose payoffs are increased in an appropriate way relative to the original claim. The results hold for a variety of options, including some path-dependent options. Constraints on the gamma of the replicating portfolio, constraints on portfolio amounts, and constraints on the number of shares are also considered.

Original languageEnglish (US)
Pages (from-to)59-79
Number of pages21
JournalReview of Financial Studies
Volume11
Issue number1
DOIs
StatePublished - Jan 1 1998

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Optimal replication of contingent claims under portfolio constraints'. Together they form a unique fingerprint.

Cite this