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What is meant by "complete" and "incomplete" markets?

February 26th, 2003, 8:30 pm

With reference to financial market, options and futures make market dinamically complete because, in theoretical terms, any option payoff could be replicated by trading underlying asset and related riskless bonds. Studies on options show that they make the market statically complete, because every trader could hedge any stock portfolio with correspondent extended option portfolio. This is an ideal environment, in fact officially quoted and OTC instruments sometimes cannot cover all ranges of strikes and expiries, matching correct volatilities of underlyings; the real quest are ways of reaching this completeness.