Abstract
In this paper, we give an explicit representation of the lowest cost strategy (or cost-efficient strategy) to achieve a given payoff distribution. For any inefficient strategy, we are able to construct financial derivatives which dominate in the sense of first-order or second-order stochastic dominance. We highlight the connections between cost-efficiency and dependence (copulas). This allows us to extend the theory to deal with state-dependent constraints to better reflect real world preferences. We show in particular that path-dependent strategies (although inefficient in the Black Scholes setting) may become optimal in the presence of state-dependent constraints.
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