An Introduction to Complete Markets

Abstract

THE PAST TWO DECADES have seen a pro- liferation of new and often complex financial securities and commodity contracts iii the mar- ketplace. Flipping through the financial pages of the newspaper, one finds, for example, that an investor can purchase the right to buy (at a fixed price on a set future date) a futures contract on 10-year U.S. Treasury notes. Alternatively, one reads of a contract that pays off various dollar amounts depending on the level of the mark- yen exchange rate at the end of October 1992 (see shaded insert at right). Are such arcana practically useful? The theory of complete - markets—an important element of modern theoretical economics—can provide some insight.