Optimal Replication of Contingent Claims under Portfolio Constraints
- 1 January 1998
- journal article
- research article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 11 (1) , 59-79
- https://doi.org/10.1093/rfs/11.1.59
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 the portfolio amounts, and constraints on the number of shares are also considered.Keywords
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