Chapter 4

Question 1

What is dj(X)?

Answer 1

The amount consumed/profit at time j under strategy X

the value of the portfolio at time j - the amount reinvested at time j to be carried over to j+1

Question 2

when can a European type contingent claim be hedged? (multi-period model)

Answer 2

if there is a trading strategy X with dj(X) = 0 for j = 1,…,n-1, whose terminal portfolio value coincides with that of C - this type of trading strategy is called a hedging strategy for C