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On option pricing in binomial market with transaction costs

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Abstract.

Option replication is studied in a discrete-time framework with proportional transaction costs. The model represents an extension of the Cox-Ross-Rubinstein binomial option-pricing model to cover the case of proportional transaction costs for one risky asset with different interest rates on bank credit and deposit. Contingent claims are supposed to be 2-dimensional random variables. Explicit formulas for self-financing strategies are obtained for this case.

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Authors and Affiliations

  1. Department of Mathematical and Statistical Sciences, University of Alberta, T6G 2G1, Edmonton, Alberta, Canada

    Alexander V. Melnikov & Yury G. Petrachenko

Authors
  1. Alexander V. Melnikov
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  2. Yury G. Petrachenko
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Corresponding author

Correspondence to Alexander V. Melnikov.

Additional information

Received: March 2004,

Mathematics Subject Classification (2000):

62P05

JEL Classification:

G11, G13

The authors are grateful to an anonymous referee for numerous helpful comments and to Yulia Romaniuk for final corrections. The paper was partially supported by grant NSERC 264186.

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Melnikov, A.V., Petrachenko, Y.G. On option pricing in binomial market with transaction costs. Finance and Stochastics 9, 141–149 (2005). https://doi.org/10.1007/s00780-004-0134-7

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  • DOI: https://doi.org/10.1007/s00780-004-0134-7

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