On the use of contingent claims in portfolio selection problems

In this paper we propose some portfolio selection models with contingent claims to invest either in the fixed income market or in the stock option market. Firstly, we describe a possible solution of the portfolio choice problem in the fixed income market taking into account the default risk. With this purpose, we consider CDSs contracts to hedge the default risk of investments in bonds. Secondly, we use European options in two distinct portfolio problems: in a reward-risk portfolio framework, to hedge the underlying portfolio risk of some stock indexes. Since we use a large number of trading European option written on principal international stock indexes, we discuss how to reduce the dimensionality of the large-scale portfolio problems taking into account the liquidity of the options. Finally, we propose an ex post empirical analysis of different portfolio models with contingent claims.