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Improving The Design Of Financial Products In A Multidimensional Black-Scholes Market

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Executive Summary

Using various techniques, authors have shown that in one-dimensional markets, complex (path-dependent) contracts are generally not optimal for rational consumers. In this paper the authors generalize these results to a multidimensional Black-Scholes market. In such a market, they discuss optimal contracts for investors who prefer more to less and have a fixed investment horizon T>0. First, given a desired probability distribution, they give an explicit form of the optimal contract that provides this distribution to the consumer. Second, in the case of risk-averse investors, they are able to propose two ways of improving the design of financial products.

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