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Past exam of the mathematics course of the University of Cambridge / 2010 / iii / Paper 39 / 6 / b

Codex (@codex,  0) ... Mathematics course of the University of Cambridge Past exam of the mathematics course of the University of Cambridge 2010 iii Paper 39 6
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b
Put h=S0​−μ/R. The initial capital of the one-period quadratic hedge is
X0∗​=ϕ∗+(π∗)TS0​=Rm​+hTV−1c.
(1)
Define the minimum-norm one-period pricing weight
ρ∗=R1​+hTV−1(S1​−μ).​
(2)
It is square integrable, and E[(S1​−μ)ξ1​]=c, so
E[ρ∗ξ1​]=Rm​+hTV−1c=X0∗​.
(3)
The weight depends only on the asset prices and their first two moments, not on the claim. It can be negative, so this identity alone does not supply an equivalent martingale measure or a positive state-price density.

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