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Hedging American contingent claims with constrained portfolios under a higher interest rate for borrowing

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  • Meng, Qingxin
  • Wang, Bo

Abstract

The paper studies the hedging problem of American contingent claims (ACCs) in a finance market with two kinds of frictions in the form of a higher interest rate for borrowing than for lending and constraints on portfolios selection. The setting is that of a continuous-time Itô process model for the underlying assets. Under the above-mentioned frictions, the upper-hedging price hup(K) and lower-hedging price hlow(K) of ACC are obtained by introducing auxiliary frictionless financial markets, which reflect the above-mentioned frictions. Furthermore, based on the principle of absence of arbitrage, we have that [hlow(K),hup(K)] is the interval of arbitrage-free prices of ACC.

Suggested Citation

  • Meng, Qingxin & Wang, Bo, 2005. "Hedging American contingent claims with constrained portfolios under a higher interest rate for borrowing," Chaos, Solitons & Fractals, Elsevier, vol. 24(2), pages 617-625.
    • Handle: RePEc:eee:chsofr:v:24:y:2005:i:2:p:617-625
    DOI: 10.1016/j.chaos.2004.09.020
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    References listed on IDEAS

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    1. Ioannis Karatzas & (*), S. G. Kou, 1998. "Hedging American contingent claims with constrained portfolios," Finance and Stochastics, Springer, vol. 2(3), pages 215-258.
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    Cited by:

    1. Zhou, Qing & Wu, Weixing & Wang, Zengwu, 2008. "Cooperative hedging with a higher interest rate for borrowing," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 609-616, April.
    2. Bo, Wang & Qingxin, Meng, 2007. "Hedging American contingent claims with arbitrage costs," Chaos, Solitons & Fractals, Elsevier, vol. 32(2), pages 598-603.
    3. Cajueiro, Daniel O. & Tabak, Benjamin M., 2007. "Time-varying long-range dependence in US interest rates," Chaos, Solitons & Fractals, Elsevier, vol. 34(2), pages 360-367.
    4. Wang, Bo & Song, Ruili, 2009. "The Application of backward stochastic differential equation with stopping time in hedging American contingent claims," Chaos, Solitons & Fractals, Elsevier, vol. 42(5), pages 2629-2634.

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