Option Replication in Discrete Time with Transaction Costs

P.P. Boyle, A.C.F. Vorst

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

Option replication is discussed in a discrete‐time framework with transaction costs. The model represents an extension of the Cox‐Ross‐Rubinstein binomial option pricing model to cover the case of proportional transaction costs. The method proceeds by constructing the appropriate replicating portfolio at each trading interval. Numerical values of these prices are presented for a range of parameter values. The paper derives a simple Black‐Scholes type approximation for the option prices with transaction costs and demonstrates numerically that it is quite accurate for plausible parameter values. 1992 The American Finance Association

Original languageEnglish
Pages (from-to)271-293
Number of pages23
JournalThe Journal of Finance
Volume47
Issue number1
DOIs
Publication statusPublished - 1992

Fingerprint

Dive into the research topics of 'Option Replication in Discrete Time with Transaction Costs'. Together they form a unique fingerprint.

Cite this