This paper derives optimal perfect hedging portfolios in the presence of transaction costs within the binomial model of stock returns, for a market maker that establishes bid and ask prices for American call options on stocks paying dividends prior to expiration. It is shown that, while the option h
✦ LIBER ✦
Option replication with large transactions costs
✍ Scribed by Ariane Reiß
- Publisher
- Springer
- Year
- 1999
- Tongue
- German
- Weight
- 129 KB
- Volume
- 21
- Category
- Article
- ISSN
- 0171-6468
No coin nor oath required. For personal study only.
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## Abstract This study uses asymptotic analysis to derive optimal hedging strategies for option portfolios hedged using an imperfectly correlated hedging asset with small fixed and/or proportional transaction costs, obtaining explicit formulae in special cases. This is of use when it is impractical