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On Leland's Strategy of Option Pricing with Transaction Costs

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  • Y. M. KABANOV
  • M. SAFARIAN

Abstract

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

Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 1995,65.

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Date of creation: 1995
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Handle: RePEc:zbw:sfb373:199565

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Cited by:
  1. Sebastien Darses & Emmanuel Denis, 2010. "Limit Theorem for a Modified Leland Hedging Strategy under Constant Transaction Costs rate," Working Papers hal-00467704, HAL.
  2. Paolo Pellizzari, 2003. "Static Hedging of Multivariate Derivatives by Simulation," Finance 0311013, EconWPA, revised 04 Dec 2003.
  3. Emmanuel Denis & Yuri Kabanov, 2010. "Mean square error for the Leland–Lott hedging strategy: convex pay-offs," Finance and Stochastics, Springer, vol. 14(4), pages 625-667, December.
  4. Erindi Allaj, 2013. "Arbitrage pricing theory under transaction costs and application to the Tobin tax," Papers 1310.1882, arXiv.org, revised Oct 2013.
  5. 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.
  6. Ehsan Azmoodeh, 2010. "On the fractional Black-Scholes market with transaction costs," Papers 1005.0211, arXiv.org.
  7. Huu Thai Nguyen & Serguei Pergamenchtchikov, 2012. "Approximate hedging problem with transaction costs in stochastic volatility markets," Working Papers hal-00808608, HAL.
  8. Ostermark, Ralf, 1998. "Call option pricing and replication under economic friction," European Journal of Operational Research, Elsevier, vol. 108(1), pages 184-195, July.
  9. Joel Vanden, 2006. "Exact Superreplication Strategies for a Class of Derivative Assets," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(1), pages 61-87.
  10. Huu Thai Nguyen & Serguei Pergamenchtchikov, 2012. "Approximate hedging problem with transaction costs in stochastic volatility markets," Working Papers hal-00747689, HAL.

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