On asset pricing in a binomial model with fixed and proportional transaction costs, portfolio constraints and dividends

Esmaeil Babaei ()
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Esmaeil Babaei: The Manchester Metropolitan University

Mathematical Methods of Operations Research, 2025, vol. 101, issue 1, No 2, 29-50

Abstract: Abstract We extend the classical binomial model proposed by Cox, Ross, and Rubinstein for derivative security pricing to encompass both fixed and proportional transaction costs, portfolio constraints including margin requirements, and dividend-paying assets. Our focus is on studying option hedging within this enriched framework. Initially, we establish the existence of a hedging strategy in this context. Subsequently, we determine the optimal hedging strategy and its associated initial cost by decomposing the problem into a sequence of hedging problems. To illustrate our approach, we present a numerical example within a 3-period binomial model.

Keywords: Binomial model; Self-financing condition; Transaction costs; Hedging; Portfolio constraints; Dividends (search for similar items in EconPapers)
JEL-codes: C61 C65 C67 G10 G11 G12 G13 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00186-024-00881-0

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