American Options under Proportional Transaction Costs: Pricing, Hedging and Stopping Algorithms for Long and Short Positions

Details American Options under Proportional Transaction Costs: Pricing, Hedging and Stopping Algorithms for Long and Short Positions American Options under Proportional Transaction Costs: Pricing, Hedging and Stopping Algorithms for Long and Short Positions

2007-09-11

arxiv.org/abs/0709.1589v1

Economy

Quantitative Finance

Pricing of Securities

34 pages, 4 figures

Scientific paper

American options are studied in a general discrete market in the presence of proportional transaction costs, modelled as bid-ask spreads. Pricing algorithms and constructions of hedging strategies, stopping times and martingale representations are presented for short (seller's) and long (buyer's) positions in an American option with an arbitrary payoff. This general approach extends the special cases considered in the literature concerned primarily with computing the prices of American puts under transaction costs by relaxing any restrictions on the form of the payoff, the magnitude of the transaction costs or the discrete market model itself. The largely unexplored case of pricing, hedging and stopping for the American option buyer under transaction costs is also covered. The pricing algorithms are computationally efficient, growing only polynomially with the number of time steps in a recombinant tree model. The stopping times realising the ask (seller's) and bid (buyer's) option prices can differ from one another. The former is generally a so-called mixed (randomised) stopping time, whereas the latter is always a pure (ordinary) stopping time.

Affiliated with

Also associated with

No associations

Rating

American Options under Proportional Transaction Costs: Pricing, Hedging and Stopping Algorithms for Long and Short Positions does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.

If you have personal experience with American Options under Proportional Transaction Costs: Pricing, Hedging and Stopping Algorithms for Long and Short Positions, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and American Options under Proportional Transaction Costs: Pricing, Hedging and Stopping Algorithms for Long and Short Positions will most certainly appreciate the feedback.

Rate now

Comments { 0 }

Profile ID: LFWR-SCP-O-392242