38 3 Utility Maximisation on Finite Probability Spaces


N
qn ξn = x, (3.16)
n=1

and

N
pn U (ξn ) = L(ξ1 , . . . , ξN , y(x)). (3.17)
n=1

In particular, we obtain that


N
u(x) = pn U (ξn ). (3.18)
n=1
N
Indeed, the inequality u(x) ≥ n=1 pn U (ξn ) follows from (3.16) and (3.8),
while the reverse inequality follows from (3.17) and the fact that, for all
ξ1 , . . . , ξN verifying the constraint (3.3), we have:


N
pn U (ξn ) ≤ L(ξ1 , . . . , ξN , y(x)) ≤ L(ξ1 , . . . , ξN , y(x)).
n=1

T (x)(ωn ) = ξn , n = 1, . . . , N .
T (x) ∈ C(x) for the optimiser X
We shall write X
Combining (3.15), (3.17) and (3.18) we note that the value functions u
and v are conjugate:

inf (v(y) + xy) = v( y (x) = u(x), x ∈ dom(U ).

y (x)) + x
y>0

Thus the relation v  (

y (x)) = −x, which was used to define y(x), translates
into
u (x) = y(x), for x ∈ dom(U ).
From Proposition 3.1.2 and the remarks after equation (3.14), we deduce
that u inherits the properties of U listed at the beginning of this chapter.
Let us summarise what we have proved so far:

Theorem 3.1.3 (finite Ω, complete market). Let the financial market S =

(St )Tt=0 be defined over the finite filtered probability space (Ω, F , (F )Tt=0 , P) and
suppose Me (S) = {Q}. Let the utility function U satisfy the above assump-
tions.
Denote by u(x) and v(y) the value functions

u(x) = sup E[U (XT )],

XT∈C(x) x ∈ dom(U ),
(3.19)
v(y) = E V y dQ
dP , y > 0.

We then have:
(i) The value functions u(x) and v(y) are conjugate and u inherits the qual-
itative properties of U listed in the beginning of this chapter.