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

Posted: 29 Mar 2001

See all articles by Claus Munk

Claus Munk

Copenhagen Business School

Abstract

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 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 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.

Keywords: Contingent claims, dynamic programming, incomplete markets, reservation prices

JEL Classification: C63, D52, G11, G13

Suggested Citation

Munk, Claus, The Valuation of Contingent Claims Under Portfolio Constraints: Reservation Buying and Selling Prices. European Finance Review, Vol. 3, No. 3. Available at SSRN: https://ssrn.com/abstract=262131

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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