Pricing a Contingent Claim Liability with Transaction Costs Using Asymptotic Analysis for Optimal Investment
We price a contingent claim liability using the utility indifference argument. We consider an agent with exponential utility, who invests in a stock and a money market account with the goal of maximizing the utility of his investment at the final time T in the presence of positive proportional transaction cost in two cases with and without a contingent claim liability. Using the computations from the heuristic argument in Whalley & Wilmott we provide a rigorous derivation of the asymptotic expansion of the value function in powers of the transaction cost parameter around the known value function for the case of zero transaction cost in both cases with and without a contingent claim liability. Additionally, using utility indifference method we derive an asymptotic expansion of the price of the contingent claim liability. In both cases, we also obtain a "nearly optimal" strategy, whose expected utility asymptotically matches the leading terms of the value function.
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- (*), Thaleia Zariphopoulou & George M. Constantinides, 1999.
"Bounds on prices of contingent claims in an intertemporal economy with proportional transaction costs and general preferences,"
Finance and Stochastics,
Springer, vol. 3(3), pages 345-369.
- George M. Constantinides & Thaleia Zariphopoulou, "undated". "Bounds on Prices of Contingent Claims in an Intertemporal Economy with Proportional Transaction Costs and General Preferences," CRSP working papers 347, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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