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

Download or read book European Option Pricing and Hedging with Both Fixed and Proportional Transaction Costs written by Valeriy Zakamulin and published by . This book was released on 2010 with total page 27 pages. Available in PDF, EPUB and Kindle. 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.