Option Replication in Discrete Time with Illiquidity

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2 Citations (Scopus)


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 languageEnglish
Pages (from-to)167-190
Number of pages24
JournalApplied Mathematical Finance
Issue number2
Publication statusPublished - 2013

All Science Journal Classification (ASJC) codes

  • Finance
  • Applied Mathematics


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