Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099734 | Journal of Economic Dynamics and Control | 2006 | 25 Pages |
Abstract
In this paper we provide a systematic treatment of the utility based option pricing and hedging approach in markets with both fixed and proportional transaction costs: we extend the framework developed by Davis et al. (SIAM J. Control Optim., 31 (1993) 470) and formulate the option pricing and hedging problem. We propose and implement a numerical procedure for computing option prices and corresponding optimal hedging strategies. We present a careful analysis of the optimal hedging strategy and elaborate on important differences between the exact hedging strategy and the asymptotic hedging strategy of Whalley and Wilmott (RISK 7 (1994) 82). We provide a simulation analysis in order to compare the performance of the utility based hedging strategy against the asymptotic strategy and some other common strategies.
Keywords
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Valeri I. Zakamouline,