European Option Pricing and Hedging with Both Fixed and Proportional Transaction Costs
Author | : Valeriy Zakamulin |
Publisher | : |
Total Pages | : 27 |
Release | : 2010 |
ISBN-10 | : OCLC:1290251095 |
ISBN-13 | : |
Rating | : 4/5 (95 Downloads) |
Book excerpt: In this paper we provide a systematic treatment of the utility based option pricing and hedging approach in markets with both fixed and proportional transaction costs: We extend the framework developed by Davis, Panas and Zariphopoulou (1993) and formulate the option pricing and hedging problem. We propose and implement a numerical procedure for computing option prices and corresponding optimal hedging strategies. We present a careful analysis of the optimal hedging strategy and elaborate on important differences between the exact hedging strategy and the asymptotic hedging strategy of Whaley and Wilmott (1994). We provide a simulation analysis in order to compare the performance of the utility based hedging strategy against the asymptotic strategy and some other common strategies.