Option pricing and replication with transaction costs and dividends
AbstractThis paper derives optimal perfect hedging portfolios in the presence of transaction costs within the binomial model of stock returns, for a market maker that establishes bid and ask prices for American call options on stocks paying dividends prior to expiration. It is shown that, while the option holder's optimal exercise policy at the ex-dividend date varies according to the stock price, there are intervals of values for such a price where the optimal policy would depend on the holder's preferences. Nonetheless, the perfect hedging assumption still allows the derivation of optimal hedging portfolios for both long and short positions of a market maker on the option.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 24 (2000)
Issue (Month): 11-12 (October)
Contact details of provider:
Web page: http://www.elsevier.com/locate/jedc
Other versions of this item:
- Stylianos PERRAKIS & Jean LEFOLL, 1999. "Option Pricing and Replication with Transaction Costs and Dividends," FAME Research Paper Series rp8, International Center for Financial Asset Management and Engineering.
- G3 - Financial Economics - - Corporate Finance and Governance
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Edirisinghe, Chanaka & Naik, Vasanttilak & Uppal, Raman, 1993. "Optimal Replication of Options with Transactions Costs and Trading Restrictions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 117-138, March.
- Michael J. P. Selby & Stewart D. Hodges, 1987. "On the Evaluation of Compound Options," Management Science, INFORMS, vol. 33(3), pages 347-355, March.
- Geske, Robert, 1979. "A note on an analytical valuation formula for unprotected American call options on stocks with known dividends," Journal of Financial Economics, Elsevier, vol. 7(4), pages 375-380, December.
- Leland, Hayne E, 1985.
" Option Pricing and Replication with Transactions Costs,"
Journal of Finance,
American Finance Association, vol. 40(5), pages 1283-1301, December.
- Hayne E. Leland., 1984. "Option Pricing and Replication with Transactions Costs," Research Program in Finance Working Papers 144, University of California at Berkeley.
- Dumas, Bernard & Luciano, Elisa, 1991. " An Exact Solution to a Dynamic Portfolio Choice Problem under Transactions Costs," Journal of Finance, American Finance Association, vol. 46(2), pages 577-95, June.
- Bernard Bensaid & Jean-Philippe Lesne & Henri Pagès & José Scheinkman, 1992. "Derivative Asset Pricing With Transaction Costs," Mathematical Finance, Wiley Blackwell, vol. 2(2), pages 63-86.
- Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
- Whaley, Robert E., 1981. "On the valuation of American call options on stocks with known dividends," Journal of Financial Economics, Elsevier, vol. 9(2), pages 207-211, June.
- Roll, Richard, 1977. "An analytic valuation formula for unprotected American call options on stocks with known dividends," Journal of Financial Economics, Elsevier, vol. 5(2), pages 251-258, November.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Nan Zhang & Alet Roux & Tomasz Zastawniak, 2011. "Parallel Binomial American Option Pricing with (and without) Transaction Costs," Papers 1110.2477, arXiv.org.
- Tokarz, Krzysztof & Zastawniak, Tomasz, 2006. "American contingent claims under small proportional transaction costs," Journal of Mathematical Economics, Elsevier, vol. 43(1), pages 65-85, December.
- Perrakis, Stylianos & Lefoll, Jean, 2004. "The American put under transactions costs," Journal of Economic Dynamics and Control, Elsevier, vol. 28(5), pages 915-935, February.
- Alet Roux, 2007. "The fundamental theorem of asset pricing under proportional transaction costs," Papers 0710.2758, arXiv.org.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.