Journal Article

The Valuation of Contingent Claims under Portfolio Constraints: Reservation Buying and Selling Prices

Claus Munk

in Review of Finance

Volume 3, issue 3, pages 347-388
Published in print December 1999 | ISSN: 1572-3097
Published online December 1999 | e-ISSN: 1573-692X | DOI: https://dx.doi.org/10.1023/A:1009856830088
The Valuation of Contingent Claims under Portfolio Constraints: Reservation Buying and Selling Prices

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With constrained portfolios contingent claims do not generally have a unique price that rules out arbitrage opportunities. Earlier studies have demonstrated that when there are constraints onthe hedge portfolio, a no-arbitrage price interval for any contingent claim exists. I consider the more realistic case where the constraints are imposed on the total portfolio of each investor and define reservation buying and selling prices for contingent claims. I derive properties of these prices, show how they can be computed numerically, and study two simple examples in which the reservation prices and the corresponding hedging strategies are compared to the Black–Scholes setting. JEL classification C63, D52, G11, G13.

Keywords: contingent claims; dynamic programming; incomplete markets; numerical solutions; reservation prices

Journal Article.  0 words. 

Subjects: Financial Law ; Financial Institutions and Services ; Financial Markets

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