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We consider a simple single period economy in which agents invest so as to maximize expected utility of terminal wealth. We assume the existence of three asset classes, namely a riskless asset #the bond#, a single risky asset #the stock#, and European options of all strikes #derivatives#. In this setting, the inability to trade continuously potentially induces investment in all three asset classes. We consider both a partial equilibrium where all asset prices are initially given, and a more general equilibrium where all asset prices are endogenously determined.
Carr et al. (Mon,) studied this question.