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Journal of Shanghai University（Natural Science Edition）

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Hedging European Contingent Claims at Higher Interest Rate for Borrowing with Transaction Costs

TANG Mao-ning1,ZHAO Fei2   

  1. 1. School of Sciences, Huzhou Teachers College, Huzhou 313000, China;
    2. School of Sciences, Shanghai University, Shanghai 200444, China
  • Received:2005-03-16 Revised:1900-01-01 Online:1900-01-01 Published:1900-01-01
  • Contact: TANG Mao-ning1

Abstract:

This paper studies the problem of hedging European Contingent Claims (ECCs) in the market that has frictions in the form of percentage management costs for holding or borrowing risk assets and a higher interest rate for borrowing than for lending. The upper-hedging price of an ECC is obtained by introducing a family of auxiliary frictionless financial markets Existence of an optimal portfolio for hedging contingent claims is shown. A similar method can be used to get a lower-hedging price and then an arbitrage-free interval.

Key words: arbitrage frictional markets, Doob-Meyer decompositions, martingale representation theorem

, pricing,

contingent claims