European and American Options Under Proportional Transaction Costs PDF Download
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Author:
Publisher:
ISBN:
Category :
Languages : en
Pages : 179
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Book Description
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages : 179
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Book Description
Author: Tomasz Zastawniak
Publisher:
ISBN:
Category :
Languages : en
Pages : 24
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Book Description
American options are priced and hedged in a general discrete market in the presence of arbitrary proportional transaction costs inherent in trading the underlying asset, modelled as bid-ask spreads. Pricing, hedging and optimal stopping algorithms are established for a short position (seller's position) in an American option with an arbitrary payoff settled by physical delivery. The seller's price representation as the expectation of the stopped payoff under an approximate martingale measure is also considered. The algorithms cover and extend the various special cases considered in the literature to-date. Any specific restrictions that were imposed on the form of the payoff, the magnitude of transaction costs or the discrete market model itself are relaxed. The pricing algorithm under transaction costs can be viewed as a natural generalisation of the iterative Snell envelope construction.
Author: Valeriy Zakamulin
Publisher:
ISBN:
Category :
Languages : en
Pages : 40
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Book Description
In this paper we examine the problem of finding the reservation option prices and corresponding exercise policies of American options in a market with proportional transaction costs using the utility based approach proposed by Davis and Zariphopoulou (1995). We present a model where the option holder has a constant absolute risk aversion. We discuss the numerical algorithm and propose a new characterization of the option holder's value function. We suggest original discretization schemes for computing reservation prices and exercise policies of American options. The discretization schemes are implemented for the cases of American put and call options. We present the study of the optimal transaction policy of the option holder. We examine the effects on the reservation option prices and the corresponding exercise policies of varying the levels of absolute risk aversion and transaction costs.
Author: Alet Roux
Publisher: VDM Publishing
ISBN: 9783836492393
Category : Algorithms
Languages : en
Pages : 0
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Book Description
This book is aimed at researchers and PhD students in mathematical finance. It studies the pricing and hedging of options in financial markets with proportional transaction costs on trading in shares, modeled as bid-ask spreads, and different interest rates for borrowing and lending of cash. This is done by means of fair pricing and super-hedging. The fair price of an option is any market price for it that does not allow traders to make profit with no risk, and a super-hedging strategy allows the seller and buyer to remain in a solvent position after respectively delivering and receiving the option payoff. Efficient algo-rithms are presented for computing the bid and ask prices of European and American options; these prices serve as bounds on the fair prices. This unifies all existing algorithms for the calculation of such prices. As a by-product, a straightforward iterative method is found for determining the optimal super-hedging strategies (and stopping times) for both the buyer and seller of an option, and also optimal stopping strategies in the case of American options.
Author: Tomasz Zastawniak
Publisher:
ISBN:
Category :
Languages : en
Pages : 25
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Book Description
American options exercised by physical delivery of a portfolio of cash and underlying stock are considered in the binary tree model under small proportional transaction costs. Dynamic programming type recursive algorithms are developed for computing the ask and bid prices of such options, extending the Snell envelope construction. Representations of the ask and bid prices of American options with physical delivery in terms of maximax and, respectively, maximin martingale expectations of stopped option payoffs are also established in this setting.
Author: Yuri Kabanov
Publisher: Springer Science & Business Media
ISBN: 3540681213
Category : Business & Economics
Languages : en
Pages : 306
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Book Description
The book is the first monograph on this highly important subject.
Author: George M. Constantinides
Publisher:
ISBN:
Category : Options (Finance)
Languages : en
Pages : 64
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Book Description
Author: Norman Seeger
Publisher:
ISBN:
Category :
Languages : en
Pages : 36
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Book Description
In this paper we theoretically analyze the effect of proportional transaction costs in the underlying on the optimal exercise strategy for American put options. Interestingly the results offer a theoretical explanation above other results in the literature for two types of empirically observed (irrational) investor's behavior; quot;faulty exercisequot; (option is exercised when not optimal) and quot;failure to exercisequot; (option is not exercised, although it is optimal). We show that for determining the exercise strategy in the presence of proportion transaction costs it becomes crucial important that (a) actually the holder of the option is in charge to decide about exercising or not, and that (b) it is important according to which investment strategy the investor is holding the option. Using a model which explicitly takes proportional transaction costs into account, we show for a realistic parameterization that, conditional on the investor's investment strategy, it maybe optimal to postpone exercising of put options, or to exercise more often compared to the standard frictionless theory. We also quantify that an investor neglecting transaction costs when determining the exercise strategy will make considerable pricing errors.
Author: Tomasz Zastawniak
Publisher:
ISBN:
Category :
Languages : en
Pages : 33
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Book Description
Dynamic programming algorithms are developed for computing the ask and bid prices of American contingent claims in a binary tree setting in the presence of small proportional transaction costs, extending the recursive construction of the Snell envelope. Associated with the pricing algorithms are iterative procedures for computing optimal hedging strategies for the writer as well as for the buyer of an American option. The bid and ask prices of an American option are represented in terms of the expectation of the option payoff evaluated at an optimal stopping time with respect to an optimal martingale probability measure. As a by-product a similar dynamic programming algorithm is obtained for pricing and hedging European contingent claims in the same setting.
Author: Stylianos Perrakis
Publisher: Springer
ISBN: 3030115909
Category : Business & Economics
Languages : en
Pages : 277
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Book Description
This book illustrates the application of the economic concept of stochastic dominance to option markets and presents an alternative option pricing paradigm to the prevailing no arbitrage simultaneous equilibrium in the frictionless underlying and option markets. This new methodology was developed primarily by the author, working independently or jointly with other co-authors, over the course of more than thirty years. Among others, it yields the fundamental Black-Scholes-Merton option value when markets are complete, presents a new approach to the pricing of rare event risk, and uncovers option mispricing that leads to tradeable strategies in the presence of transaction costs. In the latter case it shows how a utility-maximizing investor trading in the market and a riskless bond, subject to proportional transaction costs, can increase his/her expected utility by overlaying a zero-net-cost portfolio of options bought at their ask price and written at their bid price, irrespective of the specific form of the utility function. The book contains a unified presentation of these methods and results, making it a highly readable supplement for educators and sophisticated professionals working in the popular field of option pricing. It also features a foreword by George Constantinides, the Leo Melamed Professor of Finance at the Booth School of Business, University of Chicago, USA, who was a co-author in several parts of the book.
