Option replication with transaction costs: general diffusion limits

Option pricing and replication with transaction costs and dividends

This paper derives optimal perfect hedging portfolios in the presence of transaction costs within the binomial model of stock returns, for a market maker that establishes bid and ask prices for American call options on stocks paying dividends prior to expiration. It is shown that, while the option holder's optimal exercise policy at the ex-dividend date varies according to the stock price, ther...

Option Hedging with Transaction Costs

Efficient option pricing with transaction costs

proportional transaction costs using the utility-maximization framework of Davis (1997). This approach allows option prices to be computed by solving the investor’s basic portfolio selection problem without insertion of the option payoff into the terminal value function. The properties of the value function can then be used to drastically reduce the number of operations needed to locate the bou...

An Option to Reduce Transaction Costs

Under the assumptions of the market of Black and Scholes, options are redundant since, through the classic Black-Scholes delta hedging argument, they can be replaced by an equivalent combination the risky asset underlying the option and a risk free asset. We show that options are not redundant when small proportional transaction costs of size ε are added to the model, which provides mathematica...

Computing option pricing models under transaction costs

This paper deals with the Barles–Sonermodel arising in the hedging of portfolios for option pricing with transaction costs. This model is based on a correction volatility function Ψ solution of a nonlinear ordinary differential equation. In this paper we obtain relevant properties of the function Ψ which are crucial in the numerical analysis and computing of the underlying nonlinear Black–Schol...