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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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    Citations

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    Cited by:

    1. 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.
    2. repec:dau:papers:123456789/5374 is not listed on IDEAS
    3. Romuald Elie & Emmanuel L├ępinette, 2015. "Approximate hedging for nonlinear transaction costs on the volume of traded assets," Finance and Stochastics, Springer, vol. 19(3), pages 541-581, July.
    4. Pellizzari, P., 2005. "Static hedging of multivariate derivatives by simulation," European Journal of Operational Research, Elsevier, vol. 166(2), pages 507-519, October.
    5. Joel Vanden, 2006. "Exact Superreplication Strategies for a Class of Derivative Assets," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(1), pages 61-87.
    6. Ehsan Azmoodeh, 2010. "On the fractional Black-Scholes market with transaction costs," Papers 1005.0211, arXiv.org.
    7. Zhao, Yonggan & Ziemba, William T., 2007. "Hedging errors with Leland's option model in the presence of transaction costs," Finance Research Letters, Elsevier, vol. 4(1), pages 49-58, March.
    8. Elettra Agliardi & Rainer Andergassen, 2011. "(S,s)-adjustment Strategies and Hedging under Markovian Dynamics," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 36(2), pages 112-131, December.
    9. Huu Thai Nguyen & Serguei Pergamenchtchikov, 2014. "Approximate hedging with proportional transaction costs in stochastic volatility models with jumps," Working Papers hal-00979199, HAL.
    10. Thai Huu Nguyen & Serguei Pergamenschchikov, 2015. "Approximate hedging with proportional transaction costs in stochastic volatility models with jumps," Papers 1505.02627, arXiv.org.
    11. Erindi Allaj, 2013. "Implicit transaction costs and the fundamental theorems of asset pricing," Papers 1310.1882, arXiv.org, revised Jul 2017.
    12. Sebastien Darses & Emmanuel Denis, 2010. "Limit Theorem for a Modified Leland Hedging Strategy under Constant Transaction Costs rate," Working Papers hal-00467704, HAL.
    13. repec:wsi:ijtafx:v:20:y:2017:i:04:n:s0219024917500248 is not listed on IDEAS
    14. Elettra Agliardi & Rainer Andergassen, 2007. "(S,S)-Adjustment Strategies And Dynamic Hedging," Working Paper series 09_07, Rimini Centre for Economic Analysis.
    15. Thai Huu Nguyen & Serguei Pergamenshchikov, 2015. "Approximate hedging problem with transaction costs in stochastic volatility markets," Papers 1505.02546, arXiv.org.
    16. repec:dau:papers:123456789/4654 is not listed on IDEAS
    17. Ostermark, Ralf, 1998. "Call option pricing and replication under economic friction," European Journal of Operational Research, Elsevier, vol. 108(1), pages 184-195, July.
    18. Melnikov, Alexander & Tong, Shuo, 2014. "Quantile hedging on equity-linked life insurance contracts with transaction costs," Insurance: Mathematics and Economics, Elsevier, vol. 58(C), pages 77-88.
    19. Huu Thai Nguyen & Serguei Pergamenchtchikov, 2012. "Approximate hedging problem with transaction costs in stochastic volatility markets," Working Papers hal-00747689, HAL.

    More about this item

    Keywords

    Transactions costs; asymptotic hedging; call option; Black-Scholes formula;

    JEL classification:

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

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