If you need an accessible version of this item please contact JSTOR User Support

There is no Nontrivial Hedging Portfolio for Option Pricing with Transaction Costs

H. M. Soner, S. E. Shreve and J. Cvitanić
The Annals of Applied Probability
Vol. 5, No. 2 (May, 1995), pp. 327-355
Stable URL: http://www.jstor.org/stable/2245301
Page Count: 29
  • Download PDF
  • Cite this Item

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

If you need an accessible version of this item please contact JSTOR User Support
There is no Nontrivial Hedging Portfolio for Option Pricing with Transaction Costs
Preview not available

Abstract

Conventional wisdom holds that since continuous-time, Black-Scholes hedging is infinitely expensive in a model with proportional transaction costs, there is no continuous-time strategy which hedges a European call option perfectly. Of course, if one is attempting to dominate the European call rather than replicate it, then one can use the trivial strategy of buying one share of the underlying stock and holding to maturity. In this paper we prove that this is, in fact, the least expensive method of dominating a European call in a Black-Scholes model with proportional transaction costs.

Page Thumbnails

  • Thumbnail: Page 
327
    327
  • Thumbnail: Page 
328
    328
  • Thumbnail: Page 
329
    329
  • Thumbnail: Page 
330
    330
  • Thumbnail: Page 
331
    331
  • Thumbnail: Page 
332
    332
  • Thumbnail: Page 
333
    333
  • Thumbnail: Page 
334
    334
  • Thumbnail: Page 
335
    335
  • Thumbnail: Page 
336
    336
  • Thumbnail: Page 
337
    337
  • Thumbnail: Page 
338
    338
  • Thumbnail: Page 
339
    339
  • Thumbnail: Page 
340
    340
  • Thumbnail: Page 
341
    341
  • Thumbnail: Page 
342
    342
  • Thumbnail: Page 
343
    343
  • Thumbnail: Page 
344
    344
  • Thumbnail: Page 
345
    345
  • Thumbnail: Page 
346
    346
  • Thumbnail: Page 
347
    347
  • Thumbnail: Page 
348
    348
  • Thumbnail: Page 
349
    349
  • Thumbnail: Page 
350
    350
  • Thumbnail: Page 
351
    351
  • Thumbnail: Page 
352
    352
  • Thumbnail: Page 
353
    353
  • Thumbnail: Page 
354
    354
  • Thumbnail: Page 
355
    355