CFDP 1126R

Hedging with Derivatives in Incomplete Markets

Author(s): 

Publication Date: May 1996

Revision Date: June 1997

Pages: 13

Abstract: 

We present necessary and sufficient conditions on the asset span of incomplete derivative markets for insuring marketed portfolios. If the asset span is finite dimensional there exists a polynomial-time algorithm for deciding if every marketed portfolio is insurable, moreover this algorithm computes the minimum cost insurance portfolio.

In addition, we extend the Cox-Leland characterization of optimal portfolio insurance in complete derivative markets to asset spans of incomplete derivative markets where every marketed portfolio is insurable.