IDEAS home Printed from https://ideas.repec.org/h/wsi/wschap/9789812772213_0001.html
   My bibliography  Save this book chapter

The Least Cost Superreplicating Portfolio for Short Puts and Calls in The Boyle–Vorst Model with Transaction Costs

In: Advances In Quantitative Analysis Of Finance And Accounting

Author

Listed:
  • Guan-Yu Chen

    (Department of Mathematics, Cornell University, Ithaca, NY 14853, USA)

  • Ken Palmer

    (Department of Mathematics, National Taiwan University, Taipei, Taiwan)

  • Yuan-Chung Sheu

    (Department of Applied Mathematics, National Chiao Tung University, Hsinchu, Taiwan)

Abstract

Since Black and Scholes (1973) introduced their option-pricing model in frictionless markets, many authors have attempted to develop models incorporating transaction costs. The groundwork of modeling the effects of transaction costs was done by Leland (1985). The Leland model was put into a binomial setting by Boyle and Vorst (1992). Even when the market is arbitrage-free and a given contingent claim has a unique replicating portfolio, there may exist superreplicating portfolios of lower cost. However, it is known that there is no superreplicating portfolio for long calls and puts of lower cost than the replicating portfolio. Nevertheless, this is not true for short calls and puts. As the negative of the cost of the least cost superreplicating portfolios for such a position is a lower bound for the call or put price, it is important to determine this least cost. In this paper, we consider two-period binomial models and show that, for a special class of claims including short call and put options, there are just four possibilities so that the least cost superreplicating portfolios can be easily calculated for such positions. Also we show that, in general, the least cost superreplicating portfolio is path-dependent.

Suggested Citation

  • Guan-Yu Chen & Ken Palmer & Yuan-Chung Sheu, 2007. "The Least Cost Superreplicating Portfolio for Short Puts and Calls in The Boyle–Vorst Model with Transaction Costs," World Scientific Book Chapters, in: Cheng-Few Lee (ed.), Advances In Quantitative Analysis Of Finance And Accounting, chapter 1, pages 1-22, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812772213_0001
    as

    Download full text from publisher

    File URL: https://www.worldscientific.com/doi/pdf/10.1142/9789812772213_0001
    Download Restriction: Ebook Access is available upon purchase.
    File URL: https://www.worldscientific.com/doi/abs/10.1142/9789812772213_0001
    Download Restriction: Ebook Access is available upon purchase.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:wschap:9789812772213_0001. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscientific.com/page/worldscibooks .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.