On the Super-Replicating Approach When Trading a Derivative is Limited
Quantitative Finance, 2008,Vol. 8, No. 3, 285-297
28 Pages Posted: 4 Apr 2006 Last revised: 13 Nov 2017
Date Written: May 20, 2004
We extend the theory of super-replicating a European option by relaxing its two main assumptions: We take into account the constraints on trading the option and allow it to be traded inter-temporally. The first extension has a dramatic effect on the price of a portfolio hedging the option, while the second one has a dramatic effect on finding arbitrage opportunities in the market. We introduce a new approach for identifying the best arbitrage opportunities in the market with frictions.
Keywords: Derivatives, Arbitrage
JEL Classification: D52, G12, G13
Suggested Citation: Suggested Citation