Before revision: This paper studies the effects of price impact upon optimal investment , as well as the pricing of, and demand for, derivative contracts. Assuming market makers have exponential preferences, we show for general utility functions that a large investor's optimal investment problem with price impactcan be re-expressed as a constrained optimization problem in fictitious market without price impact.
After revision: This paper studies the effects of price impact upon optimal investment , as well as both pricing rules and demand schedules for contingent claims. For exponential market makers preferences, we show for general utility functions that a large investor's optimal investment problem with price impactcan be re-expressed as a constrained optimization problem in fictitious market without price impact.