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Pricing and Hedging in the Presence of Transaction Costs Under Local Risk Minimisation

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Abstract

The paper considers the continuous time pricing and hedging of European options in the presence of small transaction costs and frequent trading under local risk minimisation. The approach yields mean-self-financing strategies. The resulting dynamical hedges adapt the trading frequency in dependence on actual asset price and time to maturity. Explicit asymptotic expressions for prices and hedging strategies are derived.

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Bibliographic Info

Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 14.

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Date of creation: 01 Aug 1999
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Handle: RePEc:uts:rpaper:14

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Keywords: option pricing; transaction costs; local risk minimisation;

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