A Note on the Boyle–Vorst Discrete‐Time Option Pricing Model with Transactions Costs

Ken Palmer

Mathematical Finance, 2001, vol. 11, issue 3, 357-363

Abstract: Working in a binomial framework, Boyle and Vorst (1992) derived self‐financing strategies perfectly replicating the final payoffs to long positions in European call and put options, assuming proportional transactions costs on trades in the stocks. The initial cost of such a strategy yields, by an arbitrage argument, an upper bound for the option price. A lower bound for the option price is obtained by replicating a short position. However, for short positions, Boyle and Vorst had to impose three additional conditions. Our aim in this paper is to remove Boyle and Vorst's conditions for the replication of short calls and puts.

Date: 2001
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