IDEAS home Printed from https://ideas.repec.org/p/chf/rpseri/rp1230.html
   My bibliography  Save this paper

Option Pricing and Hedging with Small Transaction Costs

Author

Listed:
  • Jan Kallsen

    (Munich University of Technology)

  • Johannes Muhle-Karbe

    (University of Michigan at Ann Arbor)

Abstract

An investor with constant absolute risk aversion trades a risky asset with general Itôdynamics, in the presence of small proportional transaction costs. In this setting, we formally derive a leading-order optimal trading policy and the associated welfare, expressed in terms of the local dynamics of the frictionless optimizer. By applying these results in the presence of a random endowment, we obtain asymptotic formulas for utility indifference prices and hedging strategies in the presence of small transaction costs.

Suggested Citation

  • Jan Kallsen & Johannes Muhle-Karbe, 2012. "Option Pricing and Hedging with Small Transaction Costs," Swiss Finance Institute Research Paper Series 12-30, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1230
    as

    Download full text from publisher

    File URL: http://ssrn.com/abstract=2148502
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jan Kallsen & Johannes Muhle-Karbe, 2013. "The General Structure of Optimal Investment and Consumption with Small Transaction Costs," Papers 1303.3148, arXiv.org, revised May 2015.
    2. Dylan Possamai & Guillaume Royer, 2014. "General indifference pricing with small transaction costs," Papers 1401.3261, arXiv.org, revised Apr 2015.

    More about this item

    Keywords

    transaction costs; indifference pricing and hedging; exponential utility; asymptotics;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    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:chf:rpseri:rp1230. 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: Ridima Mittal (email available below). General contact details of provider: https://edirc.repec.org/data/fameech.html .

    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.