Hedging in the CRR model under concave transaction costs

MaRDI QIDQ2732369zbMATH OpenFDO

Authors Marek Kociński

Publication date 29 May 2002

Published in Demonstratio Mathematica (Search for Journal in Brave)

zbMATH Keywords

American optionsCox-Ross-Rubinstein modeldiscrete time financial marketEuropean optionsreplicating strategyriskless bondrisky stock

Mathematics Subject Classification ID

Review text

A discrete time financial market where two assets are given for trading, a riskless bond and a risky stock whose price is characterized by the so-called Cox-Ross-Rubinstein (CRR) model is considered: Transfers of wealth from one asset to another take place only at the discrete moments and the concave transaction costs for these transfers are incurred. The study of the problems considering the CRR model with proportional transaction costs is developed in this paper. It is shown that under some mild assumptions a replicating strategy is optimal for a special class of European options. For both European and American options simple descriptions of the set of capitals which are sufficient, starting from a given moment to hedge a contingent claim are given. The paper is dedicated to Professor K. Urbanik.

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Cited in

(7)

• Replication and shortfall risk in a binomial model with transaction costs
• A discrete stochastic model for investment with an application to the transaction costs case
• Problems of mathematical finance by stochastic control methods
• Hedging of the European option in discrete time under transaction costs depending on time
• Optimality of replication in the CRR model with transaction costs
• PRICING OF EUROPEAN AND AMERICAN CLAIMS IN THE CRR MODEL WITH FIXED PLUS - CONCAVE TRANSACTION COSTS
• SENSITIVITIES AND HEDGING OF THE COLLATERAL CHOICE OPTION

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