Pricing and Hedging in the Presence of Transaction Costs Under Local Risk Minimisation

John van der Hoek and Eckhard Platen (eckhard.platen@uts.edu.au)
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John van der Hoek: University of South Australia

No 14, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: The paper considers the continuous time pricing and hedging of European options in the presence of small transaction costs and frequent trading under local risk minimisation. The approach yields mean-self-financing strategies. The resulting dynamical hedges adapt the trading frequency in dependence on actual asset price and time to maturity. Explicit asymptotic expressions for prices and hedging strategies are derived.

Keywords: option pricing; transaction costs; local risk minimisation (search for similar items in EconPapers)
Date: 1999-08-01
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