3.

1 The Complete Case 35

under the constraint


N
EQ [XT ] = qn ξn ≤ x. (3.3)
n=1

To verify that (3.2) and (3.3) are indeed equivalent to the original problem
(3.1) above (in the present finite, complete case), note that by Theorem 2.4.2
a random variable (XT (ωn ))N n=1 = (ξ )N can be dominated by a random
nTn=1 N
variable of the form x+(H ·S)T = x+ t=1 Ht ∆St iff EQ [XT ] = n=1 qn ξn ≤
x. This basic relation has a particularly evident interpretation in the present
setting, as qn is simply the price of the asset 1{ωn } .
We have written ξn for XT (ωn ) to stress that (3.2) is simply a concave
maximisation problem in RN with one linear constraint which is a rather
elementary problem. To solve it, we form the Lagrangian
 N 
N 
L(ξ1 , . . . , ξN , y) = pn U (ξn ) − y qn ξn − x (3.4)
n=1 n=1

N  
= pn U (ξn ) − y pqnn ξn + yx. (3.5)
n=1

We have used the letter y ≥ 0 instead of the usual λ ≥ 0 for the Lagrange
multiplier; the reason is the dual relation between x and y which will become
apparent in a moment.
Write

Φ(ξ1 , . . . , ξN ) = inf L(ξ1 , . . . , ξN , y), ξn ∈ dom(U ), (3.6)

y>0

and
Ψ (y) = sup L(ξ1 , . . . , ξN , y), y ≥ 0. (3.7)
ξ1 ,...,ξN

Note that we have


N
sup Φ(ξ1 , . . . , ξN ) = sup pn U (ξn ) = u(x). (3.8)
ξ1 ,...,ξN ξ1 ,...,ξN n=1
N
n=1 qn ξn ≤x

 
N
Indeed, if (ξ1 , . . . , ξN ) is in the admissible region n=1 qn ξn ≤ x , then
N
Φ(ξ1 , . . . , ξN ) = L(ξ1 , . . . , ξN , 0) = n=1 pn U (ξn ). On the other hand, if
N
(ξ1 , . . . , ξN ) satisfies n=1 n n q ξ > x, then by letting y → ∞ in (3.6) we
note that Φ(ξ1 , . . . , ξN ) = −∞.
Regarding the function Ψ (y) we make the following pleasant observation,
which is the basic reason for the efficiency of the duality approach: using the