| Abstract: | A computational method is described for option replication. In particular, a procedure is provided for computing the projection basis that corresponds to a positive basis of ? m . Application of this procedure in order to compute maximal submarkets that replicate any option is demonstrated. Specifically, we provide a computational study for the replication of options in security markets with a finite number of states and a finite number of primitive assets with payoffs given by linearly independent vectors of ? m . The theoretical background of this work follows the results in Polyrakis and Xanthos [Maximal submarkets that replicate any option, Ann. Finance, DOI: 10.1007/s10436-009-0143-9]. Our goal is to make option replication computationally tractable and hence more viable as a financial tool. |
