Pricing and Hedging in the Presence of Transaction Costs Under Local Risk Minimisation
The paper considers the continuous time pricing and hedging of European options in the presence of small transaction costs and frequent trading under local risk minimisation. The approach yields mean-self-financing strategies. The resulting dynamical hedges adapt the trading frequency in dependence on actual asset price and time to maturity. Explicit asymptotic expressions for prices and hedging strategies are derived.
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