Option Prices in Presence of Transaction Cost
27 Pages Posted: 21 Mar 2002
Date Written: November 28, 2001
We provide closed formulas for European call option ask and bid prices in presence of transaction costs. Underlying prices have the same dynamics of Black-Scholes model and a bid-ask spread proportional to bid price. We suppose that a market maker has to quote a bid and ask price for an option in a perfect competition market. Under these conditions derivative prices are obtained imposing the No Almost Sure Arbitrage Principle: the market maker fixes bid (ask) price as the highest buying (lowest selling) price that can accepted by an investor who maximizes the growth rate of his portfolio.
Keywords: Option Prices, Transaction Costs
JEL Classification: G23
Suggested Citation: Suggested Citation