On option pricing in binomial market with transaction costs

Alexander Melnikov () and Yury Petrachenko ()

Finance and Stochastics, 2005, vol. 9, issue 1, 149 pages

Abstract: Option replication is studied in a discrete-time framework with proportional transaction costs. The model represents an extension of the Cox-Ross-Rubinstein binomial option-pricing model to cover the case of proportional transaction costs for one risky asset with different interest rates on bank credit and deposit. Contingent claims are supposed to be 2-dimensional random variables. Explicit formulas for self-financing strategies are obtained for this case. Copyright Springer-Verlag Berlin/Heidelberg 2005

Keywords: Binomial market; transaction costs; contingent claim; option replication; self-financing conditions (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1007/s00780-004-0134-7

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