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On Leland's strategy of option pricing with transactions costs


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  • Yuri M. Kabanov

    (Central Economics and Mathematics Institute of the Russian Academy of Sciences)

  • (*), Mher M. Safarian

    (Humboldt University, Unter den Linden, 6, D-10117 Berlin, Germany)


We compute the limiting hedging error of the Leland strategy for the approximate pricing of the European call option in a market with transactions costs. It is not equal to zero in the case when the level of transactions costs is a constant, in contradiction with the claim in Leland (1985).

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Bibliographic Info

Article provided by Springer in its journal Finance and Stochastics.

Volume (Year): 1 (1997)
Issue (Month): 3 ()
Pages: 239-250

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Handle: RePEc:spr:finsto:v:1:y:1997:i:3:p:239-250

Note: received: February 1996; final version received: October 1996
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Keywords: Transactions costs; asymptotic hedging; call option; Black-Scholes formula;

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Cited by:
  1. Elettra Agliardi & Rainer Andergassen, 2011. "(S,s)-adjustment Strategies and Hedging under Markovian Dynamics," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 36(2), pages 112-131, December.
  2. Lépinette-Denis, Emmanuel & Kabanov, Yuri, 2010. "Mean square error for the Leland-Lott hedging strategy: convex pay-offs," Economics Papers from University Paris Dauphine 123456789/4654, Paris Dauphine University.
  3. Ehsan Azmoodeh, 2010. "On the fractional Black-Scholes market with transaction costs," Papers 1005.0211,
  4. Huu Thai Nguyen & Serguei Pergamenchtchikov, 2012. "Approximate hedging problem with transaction costs in stochastic volatility markets," Working Papers hal-00747689, HAL.
  5. Pellizzari, P., 2005. "Static hedging of multivariate derivatives by simulation," European Journal of Operational Research, Elsevier, vol. 166(2), pages 507-519, October.
  6. Huu Thai Nguyen & Serguei Pergamenchtchikov, 2014. "Approximate hedging with proportional transaction costs in stochastic volatility models with jumps," Working Papers hal-00979199, HAL.
  7. Lépinette-Denis, Emmanuel & Darses, Sébastien, 2011. "Limit Theorem for a Modified Leland Hedging Strategy under Constant Transaction Costs rate," Economics Papers from University Paris Dauphine 123456789/4055, Paris Dauphine University.
  8. C. Atkinson & C. A. Alexandropoulos, 2006. "Pricing a European Basket Option in the Presence of Proportional Transaction Costs," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(3), pages 191-214.
  9. Ostermark, Ralf, 1998. "Call option pricing and replication under economic friction," European Journal of Operational Research, Elsevier, vol. 108(1), pages 184-195, July.
  10. Erindi Allaj, 2013. "Implicit transaction costs and the fundamental theorems of asset pricing," Papers 1310.1882,, revised May 2014.
  11. Joel Vanden, 2006. "Exact Superreplication Strategies for a Class of Derivative Assets," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(1), pages 61-87.


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