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

42 Pages Posted: 19 Oct 1998

See all articles by Claus Munk

Claus Munk

Copenhagen Business School

Date Written: October 1998

Abstract

With constrained portfolios contingent claims do generally not have a unique price that rules out arbitrage opportunities. Earlier studies have demonstrated that, when there are no constraints on the 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 show how these reservation prices 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. Such computations are highly relevant, e.g., for the valuation of real options.

JEL Classification: C63, D52, G11, G13

Suggested Citation

Munk, Claus, The Valuation of Contingent Claims Under Portfolio Constraints: Reservation Buying and Selling Prices (October 1998). Available at SSRN: https://ssrn.com/abstract=134069 or http://dx.doi.org/10.2139/ssrn.134069

Claus Munk (Contact Author)

Copenhagen Business School ( email )

Department of Finance
Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

HOME PAGE: http://sites.google.com/view/clausmunk/home

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