Abstract
This article studies a replication of a contingent claim in an illiquid market. We represent the liquidity as a supply curve in a discrete time model. Because the trade price of the illiquid asset is a function of the trade size in this model, it is important whether the contingent claim is physically settled or settled in cash. In both cases, we give a condition where a replication strategy exists uniquely and show some properties of the replication strategy. Further we analyse the liquidity cost numerically.
Original language | English |
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Pages (from-to) | 167-190 |
Number of pages | 24 |
Journal | Applied Mathematical Finance |
Volume | 20 |
Issue number | 2 |
DOIs | |
Publication status | Published - Feb 21 2013 |
All Science Journal Classification (ASJC) codes
- Finance
- Applied Mathematics