IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Minimizing Transaction Costs Of Option Hedging Strategies

Listed author(s):
  • E. R. Grannan
  • G. H. Swindle
Registered author(s):

    This paper introduces a method for constructing option hedging strategies in the presence of transaction costs. the approach begins with the prescription of a large, but tractable class of strategies. A variational problem is constructed in which the expected square replication error is minimized subject to a fixed initial portfolio value from among the class of strategies. the solution of this variational problem results in a replicating strategy which simulations show outperforms strategies previously considered. We illustrate this method in a particular class of strategies which contains Leland's discrete time replication scheme. We show that a strategy which uses varying time intervals between hedging can significantly reduce replication error for a given initial wealth. We will also construct and assess strategies obtained by optimizing a mean-variance criterion. This methodology extends to other optimization problems involving initial portfolio value and expected square replication error, as well as to other classes of strategies. Copyright 1996 Blackwell Publishers.

    If 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.

    File URL:
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    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.

    Article provided by Wiley Blackwell in its journal Mathematical Finance.

    Volume (Year): 6 (1996)
    Issue (Month): 4 ()
    Pages: 341-364

    in new window

    Handle: RePEc:bla:mathfi:v:6:y:1996:i:4:p:341-364
    Contact details of provider: Web page:

    Order Information: Web:

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:bla:mathfi:v:6:y:1996:i:4:p:341-364. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)

    or (Christopher F. Baum)

    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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.