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Synthetic replication of American contingent claims when portfolios are constrained

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  • Bardhan, Indrajit

Abstract

This article studies the problem of synthetically replicating an American Contingent Claim (ACC) using constrained portfolio policies. In particular, the asset mix of the replicating portfolio strategy must be maintained in a convex constraint set. Using the method of auxiliary markets of Cvitanic and Karatzas (1992), we characterize the unique replicating portfolio--consumption strategy and provide an upper bound for the fair market value of the claim. We also discuss the optimal time to exercise the claim.

Suggested Citation

  • Bardhan, Indrajit, 1995. "Synthetic replication of American contingent claims when portfolios are constrained," Stochastic Processes and their Applications, Elsevier, vol. 57(1), pages 149-165, May.
    • Handle: RePEc:eee:spapps:v:57:y:1995:i:1:p:149-165
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    References listed on IDEAS

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    1. He, Hua & Pearson, Neil D., 1991. "Consumption and portfolio policies with incomplete markets and short-sale constraints: The infinite dimensional case," Journal of Economic Theory, Elsevier, vol. 54(2), pages 259-304, August.
    2. Hiroshi Shirakawa, 1994. "Optimal Consumption And Portfolio Selection With Incomplete Markets And Upper And Lower Bound Constraints," Mathematical Finance, Wiley Blackwell, vol. 4(1), pages 1-24, January.
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    Cited by:

    1. Chen, Yingshan & Dai, Min & Xu, Jing & Xu, Mingyu, 2015. "Superhedging under ratio constraint," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 250-264.

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