On the super replication price of unbounded claims (Q1769420)

In an incomplete market the price of a claim \(f\) in general cannot be uniquely identified by no arbitrage arguments. However, the classical super replication price is a sensible indicator of the (maximun selling) value of the claim. When \(f\) satisfies certain pointwise conditions (e.g., \(f\) is bounded from below), the super replication price is equal to \(\sup_QE_Q[f]\), where \(Q\) varies on the whole set of pricing measures. Unfortunately, this price is often too high: a typical situation is here discussed in the examples. The less expensive weak super replication price is defined and requirements on \(f\) are relaxed by asking just for enough integrability conditions. By building up a proper duality theory, this paper shows its economic meaning and its relation with the investor's preferences. Indeed, it turns out that the weak super replication price of \(f\) coincides with \(\sup_{Q\in M_{\Phi}}E_Q[f]\), where \( M_{\Phi}\) is the class of pricing measures with finite generalized entropy (i.e., \(E\left[\Phi({dQ}/{dP})\right]<\infty\)) and where \(\Phi\) is the convex conjugate of the utility function of the investor.