Download this Paper Open PDF in Browser

European Option Pricing and Hedging with Both Fixed and Proportional Transaction Costs

Norwegian School of Economics and Business Administration Discussion Paper No. 19 2002

27 Pages Posted: 4 Feb 2010  

Valeriy Zakamulin

University of Agder - School of Business and Law

Date Written: November 21, 2003

Abstract

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.

Keywords: Option pricing, option hedging, transaction costs, stochastic impulse control, Markov chain approximation

JEL Classification: C61, G11, G13

Suggested Citation

Zakamulin, Valeriy, European Option Pricing and Hedging with Both Fixed and Proportional Transaction Costs (November 21, 2003). Norwegian School of Economics and Business Administration Discussion Paper No. 19 2002. Available at SSRN: https://ssrn.com/abstract=471701 or http://dx.doi.org/10.2139/ssrn.471701

Valeriy Zakamulin (Contact Author)

University of Agder - School of Business and Law ( email )

Service Box 422
Kristiansand, N-4604
Norway
+47 38141039 (Phone)

HOME PAGE: http://vzakamulin.weebly.com/

Paper statistics

Downloads
188
Rank
135,898
Abstract Views
1,132