On the Mean-Variance Tradeoff in Option Replication with Transactions Costs

Klaus Bjerre Toft

Journal of Financial and Quantitative Analysis, 1996, vol. 31, issue 2, 233-263

Abstract: This paper analyzes the tradeoff between cost and risk of discretely rebalanced option hedges in the presence of transactions costs. I present closed form solutions for expected hedging error, transactions costs, and variance of the cash flow from a time-based hedging strategy similar to that analyzed by Leland (1985). Furthermore, I characterize the cost and risk of a move-based hedging strategy without resorting to Monte Carlo simulations. All results are sufficiently general to accommodate the use of a transactions costs adjusted hedging volatility and an asset rate of return that differs from the risk-free rate of return.

Date: 1996
References: Add references at CitEc
Citations: View citations in EconPapers (33)

Downloads: (external link)
https://www.cambridge.org/core/product/identifier/ ... type/journal_article link to article abstract page (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:31:y:1996:i:02:p:233-263_00

Access Statistics for this article

More articles in Journal of Financial and Quantitative Analysis from Cambridge University Press Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK.
Bibliographic data for series maintained by Kirk Stebbing ().