Computational methods for option replication

A computational method is described for option replication. In particular, a procedure is provided for computing the projection basis that corresponds to a positive basis of R m. Application of this procedure in order to compute maximal submarkets that replicate any option is demonstrated. Specifically, we provide a computational study for replication of options in security markets with a finite number of states and a finite number of primitive assets with payoffs given by linearly independent vectors of R m. The theoretical background of this work follows the results in [7]. Our goal is to make option replication computationally tractable and hence more viable as a financial tool.