Option Prices in Presence of Transaction Cost

27 Pages Posted: 21 Mar 2002

See all articles by Roberto Baviera

Roberto Baviera

Polytechnic University of Milan - Department of Mathematics

Date Written: November 28, 2001

Abstract

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

Baviera, Roberto, Option Prices in Presence of Transaction Cost (November 28, 2001). Available at SSRN: https://ssrn.com/abstract=302652 or http://dx.doi.org/10.2139/ssrn.302652

Roberto Baviera (Contact Author)

Polytechnic University of Milan - Department of Mathematics ( email )

P.zza L. da Vinci, 32
Milan, 20133
Italy

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