Maximal submarkets that replicate any option

In this article we study the replication of options in security markets X with a finite number of states. Specifically, we study the existence of maximal submarkets (subspaces) Y of X so that any option written on the elements of Y is replicated by a marketed asset x of X. So inside these subspaces the pricing problem is simple because any option is priced by the replicating portfolio. Using the theory of lattice-subspaces and positive bases developed by Polyrakis (Trans Am Math Soc 348:2793-2810, 1996; 351:4183-4203, 1999), we identify the set of all maximal replicated subspaces. In particular, for any maximal replicated subspace we determine a positive basis of the subspace. Moreover we show that the union of all maximal replicated subspaces is the set of all marketed securities x ε X so that any option written on x is replicated. So we determine also the set of securities with replicated options. © 2009 Springer-Verlag.