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On Leland's strategy of option pricing with transactions costs

Author

Listed:
  • 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)

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).

Suggested Citation

  • Yuri M. Kabanov & (*), Mher M. Safarian, 1997. "On Leland's strategy of option pricing with transactions costs," Finance and Stochastics, Springer, vol. 1(3), pages 239-250.
    • 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;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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